By Nathan Kauffman and Matt Clark, Federal Reserve Bank of Kansas City
Lending activity at agricultural banks continued to decline in the first quarter of 2017. As economic conditions in the farm sector have remained weak, borrowers and lenders have sought to make some adjustments in financing agricultural production. Some borrowers have looked to reduce spending on farm inputs in response to persistently low profit margins. Agricultural lenders have also sought to accommodate farm borrowers by extending loan maturities when possible, despite having increased interest rates slightly to compensate for additional risk.
Farm lending at commercial banks has declined significantly for two consecutive quarters, indicating that some adjustments are being made in an environment of persistent weakness in the farm economy. In the 1980s, the accumulation of debt during the early years of the downturn in the farm economy contributed significantly to the crisis that developed later. Although the current downturn has persisted for several years and could still intensify, the adjustments being made could also place the farm sector in a more stable longer-term position.