After several years of persistently depressed net farm income, collapsing levels of working capital and rising debt, there has been growing concern about the overall health of the farm economy. Helpful measure are farm-loan delinquency rates, which are published by the Kansas City Federal Reserve Bank.
Two categories of farm-loan delinquency data are published – non-real estate and real estate.
Non-real estate-loan delinquency misleading
Figure 1 shows the share of non-real estate farm loans that are delinquent back to 1987. More specifically the data are the fourth quarter of each year. The line shows the 32-year average value for that measure – 2.26 percent.
At the end of 2018 delinquencies rates for non-real estate farm loans reached 1.84 percent. After declining to 0.7 percent in 2014, the measure has increased during the past five years. Current levels are at the worst since 2011.
Considering the data since 1987 provides some helpful perspective. The current level of 1.84 percent remains at less than the 32-year average of 2.26 percent. And the current level is well less than the increase in delinquencies observed in 2009, which peaked at 3.15 percent. The delinquencies rate on non-real estate farm loans remains less than levels experienced during the 1990s and early 2000s. That’s all to say that even though the delinquency rate has steadily increased during the past five years, the increase was from historically depressed levels.
Recently we have seen many measures of the farm economy focusing only on the past few years of data. Those measures often show an unfavorable trend, like the sharp increase observed in Figure 1 since 2014. Often those are misleading because a more-extended data series would provide more context and perspective. Consider the conclusions and headlines had Figure 1 only included data since 2014.
A larger share of non-real estate farm loans are classified as delinquent. But it’s also worth considering the size, or volume, those loans represent. In 2014 delinquent non-real estate farm loans had a collective value of $500 million. That reached more than $1 billion in 2016 but has recently declined. In 2018 the value of those loans were $860 million.
It’s worth pointing out that while the change in the share of delinquent non-real estate farm loans since 2014 has more than doubled – from 0.72 percent to 1.84 percent – the volume has increased by less than double – from $530 million to $860 million.
Real estate-farm-loan delinquency similar
Figure 3 shows the share of farm real estate loans that are delinquent. Those data, collected since 1991, have an average value of 2.3 percent. At the end of 2018 the share of farm real estate loans delinquent was 2.11 percent. Similar to Figure 1, the measure remains at less than the long-run average, and levels observed throughout most of the 1990s and early 2000s.
Figure 4 shows the volume of farm real estate loans classified as delinquent. The trend there has been different than that of non-real estate loans. The value of delinquent farm real estate loans at the end of 2019 was $2.17 billion, similar to that observed in 2009 and 2010. Keep in mind that in 2009 and 2010 the share of farm real estate farm loans delinquent was much more than today – 3.4 percent in 2010 vs. 2.11 percent in 2018. That has occurred as farm real estate debt has increased in recent years.
Wrapping it Up
Farm-loan delinquencies provide an important measure of the overall wellbeing of the farm economy. The measure has increased during the past five years. But while the trend is unfavorable, historical data provides context. Most notably current levels remain at less than the long-run averages, and levels frequently observed during the 1990s and early 2000s.
Looking ahead, delinquencies will be important to monitor if net farm income remains depressed. Working capital is precariously depressed. The farm economy needs significant improvement before stabilization and moderation can occur. In the meantime be cautious of any farm-economy data that only shows a few years of recent data. Historical context is key.
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