Farm lending recovering as interest rates rise

Farm lending continues to recover after government stimulus dollars reduced the need for loans during the pandemic, according to a recent Federal Reserve Bank of Kansas City report. 

The report, released last month, revealed a 7 percent year-over-year increase in the volume of commercial bank non-real estate farm loans during the fourth quarter of last year as larger operating and feeder livestock loans were finalized.

  The outlook for farm finances remained positive amid historically high commodity prices, but rising interest rates, challenging weather and high production costs remained top concerns. Production expenses have increased by nearly 15 percent across the farm sector since 2020 while lending has fallen by about 10 percent during the same period, wrote Senior Economist Cortney Cowley and Assistant Economist Ty Kreitman. Working capital on farms increased by nearly 60 percent, reducing the borrowing needs for producers and strengthening their ability to service debt. 

Interest rates have risen from near-zero last March to 4 to 4.25 percent this year, pushing financing costs higher for producers, and the increase could be more pronounced for operations with higher debt needs. Rates on non-real estate farm loans increased by an average of about 125 basis points from the previous quarter, according to the Fed. The average interest rate on farm loans reached a 10-year high last year, but remained near its 20-year average. “Looking ahead, however, elevated operating expenses could put additional upward pressure on loan demand,” the report stated.