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KC FEDERAL RESERVE REPORTS AG CREDIT CONDITIONS HOLD STRONG AS INTEREST RATES RISE
May 12, 2023
By Nate Kauffman and Ty Kreitman, Federal Reserve Bank of Kansas City
Agricultural credit conditions in the Tenth District remained strong and farm real estate values continued to increase, but growth has softened. Strength in farm real estate markets eased, but farmland values continued to increase despite downward pressure from higher interest rates. Farm income moderated alongside a slight pullback in commodity prices during the first quarter slowing the pace of increase in loan repayment rates. While improvement in farm finances and credit conditions steadied and some lenders expected a degree of deterioration in the months ahead, multiple years of strong incomes continued to keep credit stress low.
The outlook for the U.S. farm economy in 2023 remained favorable as prices of key commodities were at multi-year highs. Elevated production expenses, higher interest rates and drought continued to present headwinds for many producers, but current commodity prices kept profit opportunities within reach. Higher production expenses pushed many producers to increase lines of credit, but others also pursued cost-cutting measures or utilized cash to reduce financing needs, dampening loan demand at many banks. Financial performance and liquidity at agricultural banks remained solid and farm lenders appeared well-positioned to meet higher credit demand through the early months of 2023.
Interest Rates and Farmland Values
Farm loan interest rates rose alongside further increases in benchmark rates. The average rate charged on agricultural loans was about 30 basis points higher than the previous quarter and nearly 300 basis points higher than a year ago (Chart 1). Farm loan interest rates climbed alongside increases in the federal funds rate and other key benchmarks and pushed credit expenses up considerably.
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