Ag, C&I loans drop in 2Q 2021

Agriculture and commercial and industrial loans saw significant year-over-year decreases across the Upper Midwest in 2Q 2021, a trend one Federal Reserve researcher attributes to an influx of government pandemic relief and increased income from rising commodity prices. 

As of Aug. 12, aggregate agricultural production and farm real estate loans from commercial banks decreased throughout the Upper Midwest, from 19.2 percent for banks with $1 billion to $5 billion in assets in Colorado ($169.1 million for five banks in 2020 to $76.1 million this year for four banks), to one-half percent in North Dakota in the same segment, according to the FDIC and S&P Capital IQ Pro report.

The report also tracked loans for banks with less than $500 million in assets and those with $1 billion to $5 billion in assets in 14 states: Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming. Missouri was the only state where ag production and farm real loan volume increased for all three banking groups. Also, Missouri banks with between $500 million and $1 billion in assets were the only segment not to decline in aggregate commercial and industrial loan volumes. 

 Those decreases are not surprising, given the operating capital increases and high liquidity rates farms have had across the region over the previous 12 months, said David Oppedahl, an economic researcher at the Federal Reserve Bank of Chicago.  Declining loan volumes were also due to the infusion of government money into the economy during Covid-19 and corn and soybean prices rising to levels not seen in seven years following the improvement of  U.S.-China trade conditions, Oppedahl said. Ag lending will likely continue to lag during 3Q 2021, except for farm machinery and silos, he noted. However, low interest rates could motivate some farmers to borrow.  

 According to Iowa State University Extension and Outreach, the accrued net farm income of commercial Iowa farms averaged $132,339 in 2020, 72 percent higher in real terms than in 2019, and equivalent to 5.2 times the income seen in 2015. However, that income was still equivalent to less than two-thirds of the 2012 figure. Jake Crozier, ag/commercial lender at Iowa-based Peoples Bank, noted the increases come as some businesses emerged from the pandemic healthier than before, and land is proving to be an especially safe investment. He expects those trends to continue for at least the next six months. 

A 2Q 2021 survey of Federal Reserve Bank of Kansas City-area bankers that revealed soaring farm real estate values and record loan repayments also found that approximately 80 percent of bankers had reported farm income as being higher than the previous year, contributing to less demand for farm loans and easing credit issues. With support from the strong farm economy and historically low interest rates, farm real estate values increased 10 percent from a year ago, the largest increase since 2013. Loan repayment rates increased from 2020 at the fastest pace on record while renewals and extensions continued to decline. However, Oppedahl said some segments of the farm economy are still struggling, especially the dairy sector. 

Aggregate commercial real estate loans increased throughout the region year-over-year, growth sparked by spikes in CRE borrowing. Most segments saw double-digit increases, the highest being 21.1 percent for the 10 South Dakota commercial banks with between $1 billion and $5 billion in assets ($3.4 billion in 2Q 2021 compared to $2.94 billion in 2Q 2020).  Those trends come as part of a broader stretch of growth U.S. banks have seen in commercial real estate lending over the past seven years.