MAR 1, 2019 | misleading article on farm loans
There have been several negative articles lately regarding farm finances. One such article is by the Associated Press titled “Farm Loan Delinquencies Highest in 9 Years as Prices Slump.” The full article is available here. The article states that “nationwide, 19.4 percent of FSA direct loans were delinquent in January, compared to 16.5 percent for the same month a year ago.” This statement is misleading. You will note that the article states that FSA direct loans were delinquent. This would lead many to believe that nearly 20% of agricultural loans are delinquent. FSA stands for Farm Service Agency. This entity, FSA, accounts for only a small percentage, about 2%, of US farm debt:
Source: US Farm Sector Financial Indicators, USDA Economic Research Service. US Farm Debt by Lender includes both real estate and non-real estate debt.
As you can see from the chart above, US farm debt is primarily provided by Commercial Banks and the Farm Credit System. Together, these two funding sources account for 83% of US farm debt. Understanding the delinquency rates of these two funding sources is a much more meaningful exercise in evaluating the financial health of farmers. The delinquency rate for Farm Loans, which includes both Commercial Banks and the Farm Credit System, can be found below:
Source: Agricultural Finance Databooks, Federal Reserve Bank (Commercial Banks) and Annual Reports, Farm Credit Administration (Farm Credit System). Delinquency rates include accruing loans 30 days or more past due and non-accrual loans 90 days or more past due.
As you can see from the chart above, the delinquency rate on Farm Loans stands at only 1.3% as of 2018. And the highest delinquency rate for Farm Loans over the last 14 years was only 2.9%, observed in 2009 in the midst of the financial crisis. These figures are a far cry from the 19.4% delinquency rate for FSA direct loans cited by the Associated Press article.
The delinquency rates for Farm Loans are even more impressive when comparing to other asset classes. For example, delinquency rates for commercial real estate rose quickly beginning in 2007 and peaked at 8.7% in 2009, roughly triple the delinquency rate of Farm Loans:
Source: Federal Reserve Economic Data, Economic Research Division, Federal Reserve Bank (Commercial Real Estate). Delinquency rates are on Commercial Real Estate Loans excluding Farmland.
Despite multiple years of low grain prices and a trade war with China, Farm sector financial health remains sound. Although Farm Loan delinquency rates rose slightly in 2018, they remain relatively low.