Lending activity continued to decline in the fourth quarter of 2020, according to a survey of bankers by the Kansas City Federal Reserve. Overall, non-real estate loan volumes are 1% lower than last year even though they remain slightly above the 10-year average for this time of year.
"Higher crop prices and continued support from government payments likely reduced the need for smaller loans, which drove the overall decline in lending activity," Federal Reserve economists Ty Kreitman and Cortney Cowley said in a recent ag lending update.
The number of farmers seeking new operating lines of credit and other non-real estate financing declined at an average pace of about 2% throughout 2020. But while the number of loans declined, the average size of loans increased.
"The number of new bookings with balances of less than $100,000 decreased by about 30% from a year ago and accounted for nearly 90% of the overall decline. The number of notes greater than $100,000 also dropped by about 18% and together with a record low number of loans overall, the average size of all new non-real estate loans reached a historic high."
That pattern was consistent across all types on non-real estate, Kreitman and Cowley wrote. For example, the number of livestock loans declined more than 40%, while the average size loan increased by nearly 60%. Farm machinery and equipment loans saw similarly large dips in volume, with about a 30% increase in the average size loan. The decline in operating loan demand was less dramatic, with volume falling by about 20% while the average loan size grew by about 30%. Their post has a good chart showing these changes, which you can find here: https://www.kansascityfed.org/…
The post also notes that interest rates are at historic lows for the fourth quarter. Compared to last year, the average interest rate charged on a non-real estate loan declined by 110 basis points, or 1.1%. Kreitman and Cowley write that for a hypothetical Midwest grain farm, the average interest expense for a farmer financing half of his production costs was nearly 40% less than it was at the beginning of the year.
"Assuming an average yield of 175 bushels per acre, that reduction in interest expense would be equivalent to a roughly 3-cent increase in corn prices," they write. "Moving forward, loan volumes may soften further if sharp increases in prices for key agricultural commodities, such as corn, soybeans, and wheat, continue to ease financing needs for farm borrowers."
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