Farm lending trended higher during years of strong farm income, but lending also has increased in recent years as income has softened. For example, farm debt rose nearly 15 percent from the first quarter of 2012 to the fourth quarter of 2013 when farm income was near historical highs. Nevertheless, farm debt since the first quarter of 2014 has expanded about 20 percent even as income has dropped sharply. The increase in debt in both environments suggests the current amount of outstanding farm debt at commercial banks represents both capital purchases made during periods of optimistic growth and, more recently, debt to cover short-term financing needs as profit margins have narrowed.



Despite the increased lending activity, the performance of agricultural banks softened in the fourth quarter even as other small banks became slightly more profitable. Returns on assets, a typical bank performance measure, dipped below 1 percent at agricultural banks for the first time since 2010. Additionally, the difference between return on assets at agricultural banks and the same measure at other small banks has narrowed significantly (Chart 6).



The narrower gap between returns at agricultural banks and other small banks was consistent with recent trends in delinquency rates on farm loans. In the fourth quarter, delinquency rates on both farm real estate loans and farm non-real estate loans edged up whereas delinquency rates on all loans, agricultural loans included, trended lower (Chart 7). Despite the recent uptick in delinquencies on farm loans, delinquency rates remained well below the average of the past 15 years. Nevertheless, a persistently weak farm economy may force a greater number of highly leveraged producers into default, putting further pressure on profits for banks with a portfolio concentrated in agriculture.

