In June, the Department of Agricultural Economics at Kansas State University (“K-State”) released the results of its semi-annual survey of agricultural lenders. K-State began conducting the survey in 2013 to provide farmers insight into agricultural credit conditions from lenders’ perspective. The survey focuses on five main areas: farm loan interest rates, spread over cost of funds, farm loan volumes, non-performing loan volumes, and agricultural land values.
Consistent with the fall 2014 survey, lenders are concerned about the production farming sector because of lower grain and oilseed prices, increased operating costs, and lower farmland values. These concerns were reflected in the survey results—35% of respondents reported farmland values declined during January through March of 2015 and more than half of respondents expect further declines in the short term (next year) and long term (next 2-5 years). Allen Featherstone, professor and department head of the K-State Department of Agricultural Economics, noted, “Producers are going to encounter cautious lenders. Farmers will have to be well-prepared and document plans going forward to continue to access credit at good rates.”
However, despite these concerns, the survey results indicate a stronger market for agricultural loan availability. More than half of respondents reported increases in total farm loan volume over the past three months. Further, 68% of respondents expect increased loan volume in the short term, which reflects an increase from the fall 2014 survey in which 56% of respondents expected higher volumes. In the long term, 70% of respondents expect higher loan volume.
In conjunction with higher loan volume, the majority of respondents also expect higher interest rates. In the short term, approximately 60% of respondents expect higher interest rates, with the percentage increasing to more than 90% for long-term forecasts. Respondents, however, provided the most varied responses in the survey when forecasting the spread over cost of funds. K-State noted, the spread over cost of funds can be used to gauge the competition in the lending market, with lower spreads reflecting increased competition. Some of the variation in the forecasts may be because of uncertainty about competition in the agricultural lending sector, coupled with uncertainty about when interest rates will increase.
Finally, for the first time, K-State also analyzed the accuracy of respondents’ expectations by comparing what respondents reported for the past three months against the short-term expectations from the prior year’s survey. For example, short-term expectations from the spring 2014 survey were compared against what respondents reported for the past three months in the spring 2015 survey. Respondents’ expectations for loan volume and the number of non-performing loans were fairly accurate. However, respondents generally tended to be too optimistic, particularly with respect to real estate farm loans.