June 28, 2021

Farm Loan Delinquency Rate Trends

By David Widmar

What Do Farm Loan Delinquencies Tell Us About the Farm Economy?

Farm loan delinquency rates are a valuable measure for quantifying the underlying health of the farm economy. If farmers experience unexpected shortfalls in income and working capital they may be unable to meet their loan payments. An increase in farm loan delinquency rates shows an increase in farmers who are experiencing financial stress.

After trending higher for several years, high incomes in 2020 pushed farm loan delinquency rates lower. The Kansas City Federal Reserve’s Ag Finance Databook surveys and summarizes farm financial conditions within their district. These data are largely survey-based and updated quarterly.

For this article, we’ll consider the farm loan delinquency rates for farm non-real estate loans using fourth-quarter data.

Non-Real Estate Loan Delinquencies

Figure 1 shows the share of farm non-real estate loans reported as delinquent. These data go back to 1987, where they reached 6.5% at the tail end of the 1980s Farm Financial Crisis.

 Figure 1. Share of Farm Non-Real Estate Loans Delinquent, Q4, 1987-2020. Data Source: Kansas City Federal Reserve Bank. Average (in black): 2.10%


Figure 1. Share of Farm Non-Real Estate Loans Delinquent, Q4, 1987-2020. Data Source: Kansas City Federal Reserve Bank. Average (in black): 2.10%

In the fourth quarter of 2020, this rate across all banks in the Kansas City Fed district was 1.6%. This is less than the rate in 2019 of 1.8% and the series average of 2.1%.

From 2014 to 2019, the delinquency rate trended higher. On the one hand, the rates significantly jumped from 0.59% (2014) to 1.84% (2019), or nearly a three-fold increase in the share of troubled loans. On the other hand, rates in 2014 were at the lowest levels observed, and conditions remained below the decades-long average.

Regardless of how concerning the upturn was perceived, the adjustment lower in 2020 is a positive development, especially given the bleak outlook last spring and summer.

AEI Premium subscribers: click here for an analysis of real estate loan delinquencies, which follow a similar trend.

Wrapping it Up – Where is the Farm Economy Headed?

A year ago, we were concerned about where the farm economy and delinquencies might head. With the 2019 Recession in mind, we wrote about the tangled relationship between demographics, off-farm income, and farm debt. Our concern was that the farm economy – which had been struggling for several years – and off-farm sectors were both headed for trouble.

Farm loan deficiencies rates fell in 2020, a positive development that wasn’t easy to predict last summer. While this shows improvement in the farm economy, it’s worth noting the underlying financial health is not back to 2012-2014 levels. This is to say, the farm economy has improved but has not yet benefited from multiple years of strong profitability.

The Kansas City Federal Reserve reports that the outlook for agriculture remains strong heading into the summer months. Looking ahead, it will be important to monitor how significantly financial conditions improve in 2021 and for how long strong profits remain.

 

 

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