Fewer new loans to farmers continued to lead to a decline in agricultural lending activity. The historically low number of new loans contributed to an increase in the average loan size and resulted in a slight decrease in the total volume of non-real estate loans from commercial banks in the fourth quarter. Higher agricultural commodity prices, along with continued support from government payments, may have reduced the financial needs of some farmers and contributed to a slowdown in lending.
According to the National Review of Farmer Lending Conditions, lending activity of commercial banks continued to slow down in the fourth quarter. Total non-real estate loans to farms declined by about 1% year-over-year, but remained slightly above the 10-year average in the fourth quarter (Chart 1). Farm lending contracted by an average of 2% during 2020 after an average decline of almost 5% in 2019 and an average growth of more than 12% in 2018.
The smaller volumes of loans were due to fewer new loans to farmers. While the number of loans continued to decline, the average size of loans to agricultural enterprises increased for the second quarter in a row (Chart 2). The number of new bookings with a balance of less than US $ 100,000 decreased by about 30% compared to the previous year and accounted for almost 90% of the total reduction. The number of promissory notes worth more than $ 100,000 also declined by about 18%, and together with the record low total number of loans, the average size of all new non-real estate loans reached an all-time high.
Changes in the average size and number of loans were generally the same for all types of loans. For all lending purposes, the number of loans decreased, while the average loan size increased (Chart 3). Although there were fewer loans for all purposes, operating loans still accounted for the majority of non-real estate loans and accounted for more than half of the total decline.
In the fourth quarter, interest rates on agricultural loans remained at historically low levels. After rising to a 10-year high in 2018 and 2019, agricultural loan rates began to decline in the second quarter of 2020, along with a decline in base rates (chart 4). Compared to the same time a year ago, interest rates on non-real estate agricultural loans fell by at least 110 basis points for all purposes.
Along with record low interest rates on agricultural loans, interest expenses for producers have declined markedly. Compared to the beginning of the year, the annual interest cost for a hypothetical grain farmer from the Midwest, who finances half of all production costs, was almost 40% lower (Figure 5). Assuming an average yield of 175 bushels per acre, this decrease in interest costs would be equivalent to an increase in corn prices of about 3 percent.
Agricultural lenders continued to report a slowdown in lending along with improved financial conditions for farmers in the fourth quarter. Higher crop prices and continued government support likely reduced the need for small loans, leading to an overall decline in lending activity. In the future, the volume of loans may decline even further if sharp increases in prices for key agricultural commodities such as corn, soybeans and wheat continue to reduce the financial needs of borrowers on farms.