Thanks to stronger farm incomes last year, ag finance conditions improved at the end of 2010, according to Jason Henderson, Omaha Branch Executive with the Federal Reserve Bank of Kansas City. That cash infusion into producers’ pockets allowed them to pay off debts, which trimmed loan delinquencies and lifted profits at ag banks.

However, rising land values and other factors combined to boost total farm debt modestly, Henderson says in Agricultural Finance Databook – National Trends in Farm Lending.

Loan volume rose for livestock producers as high feed costs and soaring feeder cattle prices boosted average loan amounts. However, bankers indicate that ample funds are available to satisfy the farm sector’s loan demand, and at historically low interest rates.

Bankers reported that the average annual loan amount for feeder cattle rose 27%, driven by rising feeder cattle prices. Overall, in 2010, the average size of ag loans increased, with fewer operating loans and larger loans to the livestock sector.

In addition, producers restocked their iron inventory, Henderson says. Bankers saw a rise in annual intermediate loan volumes as farmers bought more machinery and equipment. In fact, the average size of machinery and equipment loans rose 6.5% from the previous year.

Higher farm incomes fueled further gains in farmland values. However, ranchland values posted more modest gains, Henderson says. Iowa posted the strongest year-over-year growth in land values at 13%, followed by Minnesota, Indiana, North Dakota, Nebraska and Kansas. Most ag bankers expect rising farm incomes and the dynamic farm real estate market to drive further land value appreciation.

Sustained by a strong farm sector, ag banks continued to outperform their peers. The average rate of return on equity at ag banks rose to 6.3% in the third quarter of 2010, far exceeding the 1.3% return at other small banks.

Ag banks also had a higher rate of return on assets than their non-ag peers, Henderson says. For the third quarter, ag banks saw a 0.7% return on assets, compared with 0.1% at other small banks. Yet, average capital ratios at both ag and other small banks were similar and continued to edge up in the third quarter.

To read the complete report, go to http://www.kansascityfed.org/research/indicatorsdata/agfinance/index.cfm