* Returns on assets, equity improve at ag banks
* Machinery and equipment loans rise
* Farmland values rise to record highs
By Christine Stebbins
CHICAGO, July 25 Demand for agricultural loans
at U.S. commercial banks rose during the first six months of
2012, led by farmer loans for machinery, grain bins and machine
sheds, the Federal Reserve Bank of Kansas City said on
"During the first quarter, commercial banks reported a 1.4
percent increase in total agricultural loan volume, led by
stronger gains in non-real estate farm loans," the Fed said in
its agricultural finance databook based on a national survey of
250 ag bankers.
"A sampling of national agricultural loan activity during
the first full week of May suggested strong agricultural lending
during the second quarter," the Fed added. "Non-real estate
loans were up almost 3 percent from the previous year."
The survey showed that cash-rich farmers were managing and
retiring their debt carefully but upgrading their land and
"Farmers continued to invest heavily in farm machinery,
equipment and structures such as grain bins, machine sheds and
land improvements. Bankers expected farm capital spending to
remain strong over the next few months," the Fed said. "In
contrast, farm operating loan demand remained sluggish as
farmers paid off operating debts and used cash to prepay input
Most bankers expect investment to continue to buoy demand,
although the worst effects of the 2012 drought were not yet seen
"Bankers expected farm capital spending to remain strong
over the next few months," the Fed said. "In contrast, farm
operating loan demand remained sluggish as farmers paid off
operating debts and used cash to prepay input costs."
U.S. FARMLAND RISES TO RECORD LEVELS
Strong farm incomes fueled farmland values to record highs.
Farmland saw double-digit gains in Iowa, Kansas, the
Dakotas, Minnesota, Montana, Nebraska, northern Illinois,
western Missouri, northern Indiana, and southern Wisconsin
during the first quarter of 2012.
"Compared with December 2011, more bankers in the Chicago,
Dallas and Richmond Districts expected farmland values to
stabilize at historically high levels in the coming months," the
Agricultural bank profits rose as farm loan performance
improved. Rising farm loan repayment rates reduced delinquency
rates and net charge-offs on ag loans. But competition to win
loans from cash-rich grain farmers was increasing pressure on
"Strong farm incomes continued to dampen farm operating loan
demand in most Federal Reserve Districts," the Fed said.
"Farmers borrowed less for operating expenses in the Chicago,
Kansas City, Minneapolis and San Francisco Districts as they
paid cash for crop inputs. High feed costs and strong feeder
cattle prices prompted further herd reductions in the Dallas and
Kansas City Districts. Herd liquidations have boosted current
profits, but could limit growth in the future.
"With sluggish operating loan demand, the availability of
funds for farm loans remained high. Collateral requirements on
non-real estate farm loans eased slightly in all Districts
except Chicago, where collateral requirements held steady.
Bankers reported lower interest rates on farm loans in the first
quarter," the Fed said.
For the first quarter of 2012 the rate of return on assets
at agricultural banks rose to 0.3 percent -- nearly double the
return at other small banks. Additionally, the average rate of
return on equity was 2.7 percent at ag banks versus 1.7 percent
at other small banks.
"During the second quarter, small- and mid-sized commercial
banks increased their non-real estate lending activity at a
faster pace than large banks," the Fed said. "The volume of
non-real estate agricultural loans made during the week at
small- and mid-sized commercial banks was 12 percent above
year-ago levels, while loans at large banks edged down."