March 6 - Agricultural production and farmland loan balances at U.S. commercial banks have increased above and beyond pre-financial crisis levels. According to an analysis conducted by SNL, loans secured by farmland rose to roughly $72 billion at the end of 2012, up from over $52 billion at the end of 2006, representing a 38 percent increase. Over the same time period, loans made for the purpose of financing agricultural production rose just over 19 percent, a rate less than that of farmland loans, but still above the 17.7 percent increase registered by banks' total loan and lease portfolios, SNL found.
SNL also found that loan balances tend to rise over the course of a year peaking in the third or fourth quarter, only to retreat in the first quarter of the following year. This phenomenon is reflective of the U.S. planting and harvesting cycles. As an example, Illinois corn farmers' planting and harvesting seasons fall during or between the second and fourth calendar quarters of each year. According to an analysis conducted by the U.S. Department of Agriculture, the most active "usual planting dates" fall between April 21 and May 23, while the most active "usual harvesting dates" lie between Sept. 23 and Nov. 5.
The SNL report states that agricultural production and farmland lending has risen drastically over the past six years, recently registering year-over-year growth rates of 5.73 percent and 6.28 percent, respectively, for the period ended Dec. 31, 2012. While these growth rates are impressive, both types of lending represent relatively small portions of total loan and lease portfolios. Together, agricultural production and farmland lending represented 1.94 percent of total U.S. commercial bank loan portfolios at the end of 2012, up from 1.78 percent at the end of 2006.
While agricultural production loan quality stands close to pre-financial crisis levels, the portion of farmland loans that are either past due or nonaccrual remains elevated, SNL found. Farmland loans registered a past due or nonaccrual rate of 2.59 percent at the end of 2012, a full 128 basis points above the 1.31 percent recorded at the end of 2006.
Within the context of the total loan portfolio, both loan types still compare favorably. Starting at the end of 2006, the portion of total loans and leases that were either past due or nonaccrual stood at 1.78 percent; over the course of the next six years the rate rose to 7.55 percent in the first quarter of 2010 only to fall back down to 4.77 percent at the end of 2012.
Farmland loan balances have increased right along with farmland values, SNL found. So much so that many fear a farmland bubble could be forming. Esther George, president and CEO of the Federal Reserve Bank of Kansas City, stated in a speech Jan. 10 that farmland prices were of particular concern. "We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances. Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. A sharp correction in asset prices could be destabilizing." Despite George's cautions, farmland values continued to rise through the end of 2012.
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