Reduced farm income continued to drive demand for short-term financing to cover operating costs. Both the number and volume of operating loans originated increased in the third quarter of 2015. The largest increase in demand was for operating loans of more than $100,000, raising concerns about debt concentration and leverage. Although increased loan volume has caused loan-to-deposit ratios to return to more historical levels, increased debt leverage and reduced liquidity have continued to intensify concerns about future financial stress for some agricultural producers.

Section A - Third Quarter National Farm Loan Data

Non-real estate farm loan volumes at commercial banks continued to increase sharply in the third quarter. Data from the Survey of Terms of Bank Lending to Farmers showed banks originated $88 billion in non-real estate loans to farmers, the highest volume originated in the third quarter since 1997, after adjusting for inflation (Chart 1). Loans used to pay current operating expenses increased 24 percent from the same quarter a year ago, and continued to drive the overall increase in non-real estate farm lending. Similar to recent trends, operating loans also were about half the volume of all non-real estate farm loans at commercial banks in the third quarter.

Chart 1: Non-Real Estate Farm Loans Volumes by Purpose, Third Quarter

Consistent increases in the number and average size of non-real estate farm loans also continued to boost lending activity in the farm sector. Historically, small loans have contributed significantly to non-real estate farm lending at commercial banks. Recently, however, loans for more than $100,000 have expanded more rapidly (Chart 2). In 2015, both the number and size of loans has increased, and the increasing volume of larger loans has driven general increases in overall loan volumes (Chart 3).

Chart 2: Number of Non-Real Estate Loans Made to Farmers

Chart 3: Volume of Non-Real Estate Loans Made to Farmers

Large, ongoing increases in operating loan volumes have raised concerns about liquidity in the farm sector. The increase in operating loan volumes in the past two years has coincided with a period of declining farm incomes. One gauge of liquidity, then, or a general ability to service short-term debt obligations, is the ratio of operating loan volumes to U.S. net farm income.

In 2015, this ratio has reached a level last seen in the mid-1980s, suggesting the farm sector, and the commercial banks that lend to the farm sector, are more exposed to short-term debt obligations and cash flow difficulties than in recent years (Chart 4).

One factor that mitigates concerns about repayment capacity, however, has been low interest rates for non-real estate farm loans. In general, farm sector interest rates have trended lower in 2015. Compared with last year, the share of non-real estate farm loans with an interest rate less than 3.0 percent has expanded in 2015, while the number of loans made with higher interest rates has continued to decline (Chart 5). In contrast to the 1980s, low interest rates on farm operating loans may continue to be an important factor in servicing short-term debt obligations.

Chart 4: Ratio of Farm Loan Volume to Net Farm Income by Loan Type

*Ratio equals four-quarter average loan volume (billion dollars) from Ag Finance Databook divided by nominal net farm income (billion dollars) from USDA Farm Income and Wealth Statistics **USDA nominal net farm income forecasts for 2014 and 2015; loan volumes forecast for the last two quarters of 2015

Chart 5: Distribution of Interest Rates on Non-Real Estate Farm Loans

Section B - Second Quarter Call Report Data

Consistent with recent survey data, commercial bank call report data has also continued to point to increasing levels of debt in the farm sector. In the second quarter, total farm sector debt outstanding at commercial banks was $156 billion, up 9.5 percent from the previous year (Chart 6). The increase marked the fourth consecutive year of rising second quarter farm sector debt at commercial banks.

Despite potential concerns of increasing debt, banks have generally not reported significant problems with delinquencies. In fact, the share of farm production loans 30 to 89 days past due (still accruing interest) was 0.40 percent in the second quarter, down from 0.44 percent in 2014. Additionally, the share of farm production loans 90 or more days past due (no longer accruing interest) fell to 0.5 percent in the second quarter from 0.6 percent and 0.8 percent in 2014 and 2013, respectively.

Chart 6: Farm Debt Outstanding at Commercial Banks

Chart 7: Loan to Deposit Ratios, Second Quarter

Large increases in farm sector lending have also boosted loan-to-deposit ratios for banks lending to the farm sector. Following the financial crisis in 2008-09, loan-to-deposit ratios at agricultural banks fell sharply, though ratios have increased steadily in recent years (Chart 7). Through the second quarter, the average loan-to-deposit ratio at agricultural banks was 78 percent, up from a low of 72 percent in 2012. Although still short of pre-crisis levels, a ratio of 78 percent represents a return to more historically normal levels.

Due in part to increased loan volumes and higher loan-to-deposit ratios, profitability at agricultural banks has generally remained strong. Through the second quarter, agricultural banks had a 0.6 percent return on assets, slightly less than a year ago, but an improvement over previous years and on par with pre-crisis years. Moreover, profits at agricultural banks have consistently been higher than nonagricultural banks in recent years. In fact, other small, nonagricultural banks have not exceeded or matched the returns of agricultural banks since the first quarter of 2007.

Section C - Second Quarter Regional Agricultural Data

The Federal Reserve Banks of Chicago, Dallas, Kansas City, Minneapolis and St. Louis (regions with traditional concentrations of agricultural) reported significant increases in loan demand in their respective districts. More specifically, second quarter regional data from Agricultural Credit Surveys showed these districts reported increased demand for non-real estate farm loans (Chart 8). This was the first time since 2008 that each of the districts reported increased demand for non-real estate farm loans in the second quarter.

Second quarter data also showed increases in loan renewals and extensions in these five Federal Districts (Chart 9). As with loan demand, this was the first time since 2012 that each of these districts reported increased demand for renewals and extensions in the second quarter. Prior to 2012, the last time these districts reported a simultaneous increase in renewals and extensions was the second quarter of 2009. Increased demand for loan renewals and extensions coincided with weaker repayment rates in each of these districts except Dallas.

Chart 8: Demand for Non-Real Estate Farm Loans, Second Quarter 2015

*Diffusion Index is calculated by subtracting the percentage of respondents who indicated "lower" from the percentage of respondents who indicated "higher" and adding 100

Chart 9: Selected Agricultural Credit Conditions, Second Quarter 2015

*Diffusion Index is calculated by subtracting the percentage of respondents who indicated "lower" from the percentage of respondents who indicated "higher" and adding 100

Land values, meanwhile, have been mixed. Nonirrigated cropland values in the second quarter declined modestly in Federal Reserve Districts throughout the Corn Belt (Map). Cropland values continued to decrease most significantly in states with higher concentrations of crop production, such as Minnesota and Iowa. Conversely, land values increased slightly in states relatively more concentrated in livestock production, such as Oklahoma, Texas, Wyoming and Colorado.

Map: Value of Nonirrigated Cropland, Second Quarter 2015

*Mountain States include Wyoming, Colorado and northern New Mexico, which are grouped because of limited survey responses from each state.


Demand for farm loans used for non-real estate purposes has been rising steadily through 2015. Increased loan volume has generally resulted in higher loan-to-deposit ratios at agricultural banks, and solid returns. High loan-to-deposit ratios and returns on assets typically are good indicators of bank profitability. However, increased lending activity has raised concerns about future repayment capacity in the face of declining farm incomes. If a period of low farm income continues, some agricultural producers may be forced to use working capital more quickly to meet increasing debt obligations. If recent trends continue, further deterioration of working capital may, therefore, adversely affect agricultural lending institutions' profitability.