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  • Unconventional Ag

Farm Loans Keep Rising in U.S. Grain Belt as Cash Squeeze Tightens

In the first quarter of 2015, farmers in the central U.S. grain and livestock states are taking out increasing numbers of operating loans as low grain prices are failing to cover the costs of production, including rents, and inputs, such as seed and chemicals, as planting season begins.

"Loan volumes for almost all farming purposes rose at commercial banks as many producers contended with tighter profit margins," states the Federal Reserve Bank of Kansas City in its quarterly review of the Corn Belt and Plain States, which account for the majority of the country’s grain, oilseed, hog, and cattle production.

Amid a biofuel boom and drought conditions across the U.S. in 2012, corn prices reached record highs, but have since fallen by 50% after two consecutive global bumper grain crops. Elevated input costs and these plummeting grain prices have resulted in increased pressure on farmers’ short term financing needs.

The Federal Reserve Bank survey conducted in the first week of February showed non-real estate farm loans were $8.1 billion higher than at the same point the year before. Interest rates remain near historic lows, and loan delinquency rates remain low with overall credit conditions and balance sheets in the grain and livestock belt continuing to be in good condition.

Due to lower feed prices, the livestock sector is continuing to see growth with the U.S. cattle herd increasing in size by 2.1% in 2014, while the U.S. hog sector has seen a 40% drop in prices since June 2014. Both these factors have driven up loans, with loans for feeder cattle increasing by more than 20% as producers rebuild herds.

Lower farm incomes have begun to pressure farmland values with the exception of premium crop or pasture land, or land with gas or oil resource. For now, farm income remains at historical averages, but, the Federal Reserve Bank notes, "If the declining trend on farm income persists, however, agricultural credit conditions could weaken more noticeably in the future."

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