Drought affects the ag economy any number of ways, not the least of which is cash flow. And if that weren’t enough, throw in other escalating input costs, such as fuel, and many farmers and ranchers found themselves in need of short-term cash to make it through harvest and weaning time.

That’s the synopsis of a survey of ag banks throughout cattle country, conducted by several district Federal Reserve banks earlier this year. “The summer drought spurred higher feed costs and farm lending activity at commercial banks,” report Jason Henderson, Omaha branch executive of the Kansas City Federal Reserve Bank, and Maria Akers, associate economist.

“During the second quarter, farm operating loans rose at their fastest pace in five years,” the economists say in a report of the survey findings. What’s more, their survey this August revealed additional demand for short-term operating loans in the third quarter as input costs continue to escalate.

Part of the need for short-term cash is driven by feeder cattle loans. “Lending to livestock operations jumped as feed costs spiked and herd liquidation boosted loans for feeder cattle,” according to the economists. In fact, the volume of feeder livestock loans reached a two-year high and exceeded 2011 levels by 60%, more than offsetting a drop in other types of livestock loans.

For crop producers, higher fuel costs to power irrigation systems and harvest their crops caused some need for short-term cash. Longer term, investment in farm machinery and equipment remained strong, although some bankers expect capital spending to slow as producers evaluate cash needs.

On the other hand, ag real estate continues to be in demand. Typically, the economists say, farm sales slow during the summer months, then pick up after harvest. Following this trend, farm real estate loans held steady in the second quarter, even as bankers report higher farmland values.

Bankers in the Corn Belt and Northern Plains report strong year-over-year farmland value gains, according to the report. In Nebraska and South Dakota, non-irrigated cropland values remain more than 30% above year-ago levels, and robust energy production continued to drive prices higher in North Dakota.

In contrast, a second consecutive drought year in Texas kept farmland values steady with year-ago levels. Bankers in the Dallas and Richmond Federal Reserve districts expect demand for ag real estate loans to soften in the coming months. However, ag bankers in the Kansas City, Denver and San Francisco districts report stronger annual gains even in the face of dry conditions.

Read the complete lending report.