Throughout the summer, we’ve been reviewing the latest Kansas City Federal Reserve data on farm loans. This article highlights three charts that summarize trends in farm loans.
#1. Farm Loan Delinquencies Fall, Nearing All-Time Lows
The delinquency rate on farm loans is a valuable measure of how stressful financial conditions in the farm economy are. After trending higher from 2014 to 2019, delinquencies fell sharply in 2020 and 2021 (Figure 1). Currently, farm real estate delinquencies are 1.44%, down from 2.05% (2020) and 2.21% (2021) in recent years. Only twice before – 2005 (1.34%) and 2006 (1.31%) – have farm real estate delinquencies been lower.
Despite the farm economy stresses from 2014-2019, delinquencies overall remained low and below the long-run average of 2.28%. Conditions throughout most of the 1990s and the Great Recession had higher delinquency rates. Looking ahead, the farm economy will benefit from historically low delinquencies at the end of 2021 should the farm economy turn less favorable in the future.
#2. Farm-Level Interest Rates: From Career Lows to Decade Highs?
While attention has largely focused on the Federal Reserve’s – thus far – four rate hikes in 2022, interest rates have been on a decades-long decline. Farm real estate loans slipped below 5% in the third quarter of 2020 – for the first time ever – and remained below the threshold through early 2022 (Figure 2). Between 2021Q2 through 2021Q4, the average interest rate on farm real estate was 4.6%, the lowest observation in the dataset. The most recent observation, 2022Q1, posted a small upturn to 4.8%.
It’s safe to say the interest rates on farm real estate loans have turned higher since early 2022. For example, 10-year treasuries in 2022Q2 were nearly 140 basis points higher than in 2021Q4. What’s unknown at this point is how much higher farm-level rates will trend throughout 2022. It seems possible for farm interest rates to jump from career lows in 2021Q4 to decade highs in 2022. That said, keep in mind that farm real estate interest rates were frequently above 8% throughout the 1990s.
#3. Longer Repayment Terms Should be Overlooked
When interest rates are lowered and repayments periods are stretched out, it makes servicing debt a lot easier. To illustrate this, we created the Farm Machinery Debt Service Index (Figure 3). This measure reports the annual payment required to service $1,000 of farm machinery debt.
At the extreme, the Index exceeded $1,600 in 1982 and spent the first half of that decade above $1,000. How does this happen? First, interest rates on farm machinery loans were double digits, peaking at 17.9% in 1981. Second, repayment terms were extremely short and frequently less than 12 months. Not ideal times to carry significant amounts of debt.
Currently, conditions have benefited from long repayment periods and low interest rates. For nearly a decade, or since 2013, the Index has been below $400. This is significant as the Index previously dipped below $400 only twice, in 1994 ($387) and in 2011 ($384). In 2020, the annual data reached an all-time low of $287. For 2021, the Index remains historically low at $305 but turned higher due to shorter repayment terms (43.1 months in 2021 versus 46.7 months in 2020).
For 2022, interest rates will be higher, but it’s unclear how repayment periods might adjust.
Wrapping It Up
At the time of this writing – the summer of 2022 – farm debt markets are adjusting to the realities of higher interest rates throughout the entire U.S. economy. While it’s easy to become hyper-focused on the Fed’s next announcement, it’s important not to lose sight of the bigger picture trends.
First, farm loan delinquencies have turned lower and point to low financial stress in the sector. Second, interest rate hikes are occurring from the starting point of career lows. While “decade highs” might be possible headlines by the end of the year, those rates could still be considerably lower than levels observed throughout the 1990s and 2000s. Finally, the combination of low interest rates and longer repayment terms has made it easier to service $1,000 of farm machinery debt over time. While rates will be higher in 2022, it’s unclear how burdensome debt service might be without first considering the length of repayment.