Despite softer national farm loan activity, banks cut interest rates on non-real estate loans to boost farm lending in the third quarter. Large banks, those with farm loan portfolios greater than $25 million, dropped the average effective interest rate on non-real estate farm loans to 3.6% during the quarter, well below the rate charged at small or mid-sized banks.

These lower interest rates spurred sharp annual gains in non-real estate loan volumes at large banks, compared with declines at small or mid-sized banks. Large banks originated most of their loans with floating interest rates, whereas small and mid-sized banks extended variable rates on less than half of their loans. Despite a recent decline, the risk ratings and delinquency rates on farm loans at large banks remained well above levels at other small and mid-sized banks.

Still, overall farm lending was flat in the third quarter, as strong ag profits limited non-real estate loan demand. Operating loan volumes held steady with higher input costs, but equipment and livestock loan volumes fell below year-ago levels. Loans for farm machinery plummeted as many producers already upgraded equipment following last year’s harvest. Bankers indicated ample funds were available for qualified borrowers, and some bankers eased collateral requirements on non-real estate loans.

In contrast, farm real estate loans accounted for a larger share of farm lending during the third quarter. National farmland values climbed higher in the second quarter, with anecdotal evidence of further gains during the third quarter. Annual farmland value gains reached record levels in many states, most notably in the Corn Belt and Northern Plains where land prices rose more than 25% above year-ago levels.

Agricultural banks posted solid profits in the second quarter as improved repayment rates trimmed farm loan delinquencies. Lower delinquency rates on non-real estate loans and steady delinquency rates on real estate loans helped strengthen bank profits. Moreover, a decline in the volume of farm loans 30-90 days past due suggests that additional declines in farm loan delinquency rates may be forthcoming.

Visit www.kansascityfed.org for more information. Find more research on ag and rural economies here.