Agricultural debt at commercial banks eased further at the end of 2020, and loan repayment problems moderated slightly. General improvement in the agricultural economy likely drove the pullback in farm lending activity and strengthened credit conditions. Higher crop prices and an influx of government payments in 2020 also contributed stronger growth in deposits, which supported a sharp increase in liquidity at agricultural banks.

Data and Information

Excel SpreadsheetHistorical Data | Excel SpreadsheetTables | txtAbout Commercial Bank Call Report Data  

Fourth Quarter Commercial Bank Call Report Data

Agricultural loan balances at commercial banks reached a five-year low in the fourth quarter and continued to shift toward farm real estate. Although the accumulation of farm debt remained higher than the average of the past ten years, the total value of farm loan portfolios fell 5% from the previous year (Chart 1). Moreover, loans to purchase farmland accounted for 57% of total loan volumes, which was the highest allocation for real estate loans on record.

1.	Chart 1: Farm Debt Outstanding at Commercial Banks, is a stacked area chart showing a four-quarter moving average of the amount of farm debt outstanding at commercial banks, including farm real estate and non-real estate farm loans in billions dollars adjusted for inflation, from 1976 to 2020. The chart also includes lines depicting the ten year average for both loans types and shows that the amount for both declined in 2020, but remained slightly above the ten year average.  Note: Annual changes from September 30, 2019 to June 30, 2020  are adjusted to account for changes due to exclusion of Rabobank, N.A. from commercial bank Call Report data beginning September 30, 2019. Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

Total farm debt decreased at the fastest pace since the 1980s, with continued declines in both farm real estate and production loans. In the fourth quarter, the drop in total farm debt was driven by a 9% decline in non-real estate loans and a 1% decline in real estate loans (Chart 2). Although the decline in loans to finance farm real estate remained small, it was the first time farmland loans decreased for three consecutive quarters since 1981.

2.	Chart 2: : Farm Debt Outstanding at Commercial Banks, is a line graph showing the annual percent change in farm real estate, non-real estate farm loans and total farm loans at commercial banks from 2000 to 2020. Non-real estate farm loans declined nearly 10% in Q4 2020 and farm real estate loans declined less than 2%, but the pace of decline for both increased from the previous quarter. Note: Annual changes from September 30, 2019 to June 30, 2020  are adjusted to account for changes due to exclusion of Rabobank, N.A. from commercial bank Call Report data beginning September 30, 2019. Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

Alongside better farm financial conditions and lower debt levels, delinquency rates on agricultural loans declined from a year ago. From 2014 to 2019, delinquency rates on farm loans grew by about 0.2 percentage points per year in the fourth quarter, on average. (Chart 3). However, the share of real estate and non-real estate loans past due fell 0.16 and 0.24 percentage points, respectively, from the previous year in 2020, which was a notable reversal of the previous trend.

3.	Chart 3: Farm Loan Delinquency Rates, Fourth Quarter, is a line graph showing delinquent real estate and non-real estate farm loans as a percent of outstanding loans from 2001 to 2020. The chart also includes a trend line for each for the time period of 2014 to 2019. After increasing steadily since 2015, the delinquency rate for both loan types declined to below the trend line in Q4 2020. The delinquency rate on farm real estate loans declined from 2.2% in Q4 2019 to 2.0% in Q4 2020. The delinquency rate on non-real estate loans declined from 1.8% in Q4 2019 to 1.60% in Q4 2020. Note: Includes loans 30 days or more past due and non-accruing loans.  Source: Reports of Condition and Income and Federal Reserve Board of Governors.

In contrast to recent years, liquidity at agricultural banks surged in 2020. Total deposits at agricultural banks increased almost 3% from the previous year in the fourth quarter. In addition, total loans outstanding decreased nearly 8%. The strong growth in deposits combined with the decline in loan balances led to a significant decline in loan-to-deposit ratios (Chart 4).

4.	Chart 4: Loan-to-Deposit Ratio at Agricultural Banks, shows the loan-to-deposit ratio at agricultural banks from 2000 to 2020 and also includes a four-quarter moving average.  Following a steady increase since 2014, the loan-to-deposit ratio declined from around 82% in 2019 to 72 percent in Q4 2020.  Source: Reports of Condition and Income and Federal Reserve Board of Governors.

Agricultural banks remained financially strong, despite a historically low net interest margin. Interest income decreased more than interest expense and asset balances increased at agricultural banks in 2020, driving a sharp decline in the net interest margin (Chart 5). A tighter margin likely put some downward pressure on income and the ability to grow capital stocks. However, the return on assets and the equity capital ratio at agricultural banks remained historically high.

5.	Chart 5: Select Financial Indicators at Agricultural Banks, includes two individual charts. Left, Earnings, Fourth Quarter shows a line graph of the net interest margin (NIM) and return on average assets (ROAA) at agricultural banks in the fourth quarter from 1985 to 2020, including the ten year average. Right, Equity Capital Ratio, Fourth Quarter, shows a line graph of the equity capital ratio at agricultural banks in the fourth quarter from 1985 to 2020, including the ten year average. The net interest margin declined 3.68% in Q4 2019 to 3.32% in Q4 2020, well below the ten year average of 3.63%. The return on average assets declined 1.28% in Q4 2019 to 1.20% in Q4 2020, but remained above the ten year average of 1.12%. The equity capital ratio declined 11.75% in Q4 2019 to 11.25% in Q4 2020, but remained near the ten year average of 11.18%. Source: Reports of Condition and Income and Federal Reserve Board of Governors.

Conclusion

Farm debt outstanding at commercial banks continued to decline through the end of 2020. The pace of decline increased slightly from the previous quarter and agricultural loan balances dropped closer to the ten-year average. Alongside general improvement in the farm economy and a pullback in lending, bank liquidity surged, supporting a stronger outlook for loan performance. Moving forward, the pace of lending to farmers may remain slower than in previous years, as 2020 government payments and recent strength in crop prices have improved borrower liquidity and farm balance sheets.

Endnotes

  1. 1

    Agricultural banks include all banks with agricultural loans comprising at least 25 percent of total loans in each quarter. The panel of agricultural banks is specific to each quarter and data are not adjusted to account for banks meeting the agricultural bank threshold in any previous quarter, but not the current quarter.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. 

Authors

Cortney Cowley

Economist

Cortney Cowley is an economist in the Regional Affairs Department of the Federal Reserve Bank of Kansas City. Her current research focuses on agricultural finance, commodity mark…

Ty Kreitman

Assistant Economist

Ty Kreitman is an assistant economist in the Regional Affairs Department at the Omaha Branch of the Federal Reserve Bank of Kansas City. In this role, he primarily supports the F…