Production loans boost farm debt

Farm debt has continued to increase alongside faster growth in farm-production loans. Similar to recent quarters, outstanding agricultural-loan balances at commercial banks have increased by about 5 percent. Non-real-estate loans increased at the fastest pace since 2016 while growth in real-estate loans slowed slightly. Even as debt balances continued to grow, farm-loan performance remained strong and delinquency rates have decreased slightly for the third-consecutive year. The net interest margin and return on assets at agricultural banks were more than a year ago, but softened slightly from the previous quarter as funding costs for lenders continued to increase.

The outlook for agricultural-credit conditions remained strong despite a recent moderation in the farm economy. A slight pullback in the prices of key farm products and increased expenses could thin margins for some producers, but farm finances remained strong following several years of considerable strength. Increasing production costs and depletion of working capital could further increase credit needs, particularly for producers who have used cash reserves to reduce loan levels in recent years. Although a growing share of lenders expect farm income and repayment rates to soften in the months ahead, agricultural-credit conditions are likely to remain strong through 2023.