Large Operating Loans Continue to Drive Growth in Farm Lending Activity

Farm lending activity continued to expand alongside growth in operating loans. According to the Survey of Terms of Lending to Farmers, the volume of new operating loans at commercial banks increased over 40% from last year, following annual growth of about 20% the previous quarter. Similar to last quarter, larger loans and loans originated at small or mid-sized lenders drove the increase in short-term financing. Interest rates on farm loans remained elevated, but maturities declined following dramatic increases earlier in the year.

Weak profit margins in the crop sector continued to weigh on the farm economy even as prospects in the cattle industry remained strong. Farm operating debt has grown at a rapid pace alongside lower crop prices and persistently high production costs while lending activity for other types of loans has softened. A moderation in farm sector liquidity and higher interest rates has likely contributed to reduced demand for machinery lending and reduced spending on more discretionary purchases.

Third Quarter National Survey of Terms of Lending to Farmers

Growth in farm operating loans continued to strengthen in the third quarter. The volume of new operating loans increased at the fastest pace since 2017, contributing to a 10% increase in lending for key types of non-real estate farm debt (Chart 1). Similar to the previous quarter, demand for loans that typically fund non-specified and miscellaneous purchases slowed significantly and contributed to a decline in total non-real estate lending.

The volume of operating loans grew alongside a considerable increase in large loans. The number of loans larger than $1 million increased sharply in the third quarter, rebounding to a level above the historic trend following a pullback during most of 2023 (Chart 2, left panel). For the first time in at least two decades, the volume of loans larger than $1 million eclipsed the volume of loans smaller than $1 million (Chart 2, right panel).

Despite substantial growth in larger loans, the growth in loan volumes was concentrated among small and mid-sized lenders. The volume of new farm loan originations at small and mid-sized banks continued to increase in the third quarter while farm loans at large banks declined at a faster pace (Chart 3). Coming out of the pandemic, lending activity declined at smaller lenders and increased at larger institutions, but that trend reversed in 2023 and has continued into 2024.

Interest rates on farm loans were steady in the months prior to the recent decline in the federal funds rate. Average interest rates on all farm loans remained slightly above 8% in the third quarter of 2024, well above average levels from two years ago (Chart 4). Rates changed by less than 10 basis points on loans of most sizes and remained slightly lower on larger notes.

Loan durations moderated from levels that were considerably higher in previous quarters. The average duration of non-real estate loans fell by about five months from the previous quarter (Chart 5). Average maturities declined for loans of all sizes but most notably for larger loans.