Reuters, April 30, 2012

U.S. farmers are buying equipment as agricultural finances strengthen, the Federal Reserve Bank of Kansas City said in its quarterly report on national farm lending.

"Loans for farm machinery and equipment held at high levels with a sharp jump in the volume of intermediate-term loans," the bank said in its survey, which included national statistics from a Fed survey of banks from the week of February 6.

Total U.S. agricultural loans reached $79.1 billion in the first quarter of 2012, up from $62.8 billion for the same period a year ago. Farm machinery and equipment loans hit $6.9 billion, near the peak demand of $7.1 billion in the first quarter of 2011.

Agricultural banking assets and balance sheets are closely monitored by economists and bankers at the Federal Reserve and by commercial bankers to gauge the health of the rural economy and money supply.

U.S. Agriculture Department projections estimate U.S. farmers' net assets will rise above $2.2 trillion in 2012, as grain farmers, buoyed by exports and ethanol continue to retire debt, expand land holdings and upgrade equipment including: combines, planters, on-farm storage bins and irrigation systems.

The outlook adds up to good demand from suppliers such as John Deere, AGCO, Monsanto and many others.

Non-real estate loan volumes rose 26% compared with last year, driven by a spike in intermediate-term, large loans for unspecified "other" purposes, the Fed said.

"With low cow inventories lifting feeder cattle prices, banks also made larger short-term loans to the livestock sector," the U.S. central bank said.

Commercial loan demand from farmers may be understating strength of their buying, as many are buying with cash. Loans direct from the suppliers may also be trimming the need for private bank loans.

Overall, strong farm income combined with record farmland prices — up as much as 40% last year despite the large number of farms for sale — kept loan demand from crop producers flat heading into the planting season, the Fed report said.

2011: A Good Year For Ag Banks

Bank profits climbed in the fourth quarter of 2011 amid a decline in loan delinquencies and higher loan repayment rates — most notably in the Chicago Fed's district, which encompasses the heart of the Corn Belt.

Ag banks in 2011 posted their "best financial performance in three years," the Fed said.

"The average rate of return on equity at agricultural banks rose to 9.3% in the fourth quarter, well above the 3.8% reported for other small banks. In addition, the%age of agricultural banks with negative income as a share of average equity fell to a 4-year low."

Bankers reported plenty of funds were available for farm loans at historically low interest rates, noting that overall loan demand stayed weak in the fourth quarter despite additional capital spending.

"After falling in 2011, feeder cattle and dairy loans were expected to hold steady in the Chicago, Dallas and Richmond districts," the Fed added.

Crop insurance and land lease revenues from mineral rights supported farm income and loan repayment rates in drought areas, according to bankers in the Kansas City and Dallas districts.

Loan renewals and extensions fell in all districts except that of the San Francisco Fed.

"Bankers in the Chicago, Richmond and San Francisco districts generally eased collateral requirements compared with last quarter, while slightly more bankers in the Dallas, Kansas City and Minneapolis districts raised collateral requirements on non-real estate farm loans," the Fed's national survey reported.