Drought spurs farm lending to highest level in five years

The summer drought spurred higher feed costs and farm lending activity at commercial banks, according to the Federal Reserve System's Agricultural Finance Databook.

During the second quarter, farm operating loans rose at their fastest pace in five years. An August survey of national commercial banks revealed additional demand for short-term farm operating loans in the third quarter as input costs soared. Lending to livestock operations jumped as feed costs spiked and herd liquidations boosted loans for feeder cattle. Higher fuel costs to power irrigation systems and harvest crops also increased lending to crop producers.

Drought conditions had little impact on farmland markets as markets followed seasonal trends. Many agricultural bankers expected farmland values to stabilize until after harvest, when more farms would be put up for auction. The strongest farmland value gains emerged in the central Plains, where irrigation is prevalent, and the northern Plains, where land lease revenues from mineral rights continue to climb.

Flush with deposits, bankers reported having ample funds to meet additional loan demand. Higher farm loan volumes helped lift loan-to-deposit ratios off recent lows, and competition among agricultural lenders for qualified borrowers remained heated. Farm loan delinquency rates declined further, and bankers expected loan repayment rates to remain solid as high crop prices compensate for lower yields and crop insurance payments support farm income.

The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data. The complete release is available here.

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My concern as a banker, farmer and real estate appraiser is new higher land prices may be only temporary. If they are sustainable, what combination of factors will support this?