An expected increase in loan interest rates has dampened ag lender optimism, according to Kansas State University’s just-released semi-annual survey of lenders.
More than 93 percent of the 58 respondents expect long-term rate increases for farm real estate and for operating loans.
Less than half of the respondents expect higher short-term interest rates, either for real estate loans and or operating loans.
Short-term in the survey is described as within a year, and long term is two to five years.
If interest rates begin to go up, they will have a negative effect on farmers and ranchers directly and indirectly, said Allen Featherstone, K-State University professor of ag economics.
An increase in interest rates would impact all new loans and about half of the outstanding ag loans, which have variable rates, he said.
That said, interest rates on ag loans remain at historic lows. The Kansas City Federal Reserve Bank reports interest rates for the most recent new farm loans at 4 percent for non-real estate ag loans and 5.6 percent for ag real estate loans.
“Interest rates are very low from a historic perspective,” Featherstone said.
But higher interest rates could also affect exchange rates. If higher interest rates cause the dollar to strengthen compared to other currencies, U.S. exports will be less competitive globally and likely result in a softening of trade prospects, he said.
Expected increases in interest rates are not due to increased risks in the ag sector. They’re just following higher rates set by the Federal Reserve to tighten the money supply, he said.
Lenders are also expecting more non-performing loans, those in default or near default, with 22 percent of respondents expecting an increase in the short term and 53 expecting an increase in long-term.
That’s up 9 percent and 13 percent, respectively, from the fall survey, but it’s not concerning, Featherstone said.
The ag sector is so safe and has been performing so well from an overall income perspective that all loans have been performing well in most ag sectors, he said.
Lenders expect more of a return to normal on that front, he said.
Lenders also expect a decrease in ag land values, with 59 percent expecting a decrease in the long term. Lenders are also a little more pessimistic in the shorter term, with 33 percent of respondents expecting decreased land values, compared to 16 percent last fall, Featherstone said.
The big influence on expected decreases in ag land values are lower prices for major crops, driven by corn and soybeans, which have been decreasing substantially in the last three to four months, he said.
The income prospects for corn and soybeans, and for wheat to some extent, are much more concerning than they were in the fall, he said.
A bright spot in the survey is that lenders expect an increase in the farm loan dollar volume, with 77 percent of respondents expecting an increase short term, up 31 percent from the fall. Expected long-term increases are up 16 percent to 79 percent of respondents.
That indicates money will be available and a good ability for producers to borrow money if need be, and some lenders expect more money will be available if needed, he said.