Farm debt has received increased attention in recent years. During the past two decades farm debt has increased – approaching levels last observed in the 1980s. Even as farm income has increased producers are still relying on inflated debt levels. Offsetting some of the challenges of increased debt levels have been better interest rates and lesser interest expenses. This week’s post considers another important trend in farm debt – longer repayment terms.
Repayment terms change rapidly
Figure 1 shows the annual average repayment terms on all non-real-estate farm loans. Since the 2000s that measure spent most of its time between 12 and 14 months. But two considerations are worth noting. First notice the dip in repayment terms between 2008 and 2009. As the U.S. economy entered the Great Recession – fueled by the housing-finance market- repayment terms being sharply contracted. Specifically average repayment terms decreased from 13.8 in 2008 to slightly less than 11 months. Not only was the change significant, but it also swung from one extreme to the other in just a year. Repayment terms would not again exceed 14 months until 2012.
The second observation is that non-real-estate loans have been termed out across more years through time, especially in recent years. That’s a trend we first noticed three years ago. The average repayment term on all non-real-estate loans in 2018 was 15.4 months. That’s the greatest level observed in Figure 1. Furthermore it’s the most annual observations noted in the data series, dating back to 1977. Plotting a trend-line in Figure 1 from 2000 to 2018 reveals that repayment terms increased at a rate of one month added every six years.
Machinery, equipment terms long
Digging into something more tangible, Figure 2 shows average annual repayment terms for farm machinery and equipment loans. Again the trend has been toward inflated rates through time. In the early 2000s loan terms were often about 25 months. Repayment terms reached more than 40 months in 2013 and 2015. Most recently repayment terms have decreased, to about 34 months in 2018. While this is less than recent years, terms remain historically long. Again those data have been tracked by the Kansas City Federal Reserve since 1977; during the past 42 years only in seven years or 17 percent of the time have farm machinery and equipment loans been termed for more months – at 33.9 months in 2018.
Between 2000 and 2010 the average repayment term for machinery was 23.4 months. The 2018 levels of 33.9 represent repayment terms that are 45 percent longer.
Livestock terms increase
Another category of farm loans to consider are livestock loans. Figure 3 shows the average annual terms on “other livestock” loans. Specifically those are livestock loans that are not for “feeder livestock” such as feeder cattle. Consistent with earlier data, repayment terms have also increased through time. They reached 18.4 months in 2018. That’s much longer than the average of 11.5 months between 2000 and 2010. Moving from 11.5 months to 18.4 months is a 60 percent increase.
Wrapping it Up
In recent years the farm economy has relied upon increased debt. That was observed for farm machinery, livestock and all non-real-estate loans.
On the one hand longer repayment terms – coupled with historically better interest rates – makes it easier for producers to meet the annual debt-service obligations of historically inflated debt levels. Longer terms and lesser rates are certainly preferred to a scenario of short repayment terms and increased interest rates.
On the other hand extended debt terms leave producers “on the hook” for a longer period of time. For machinery and livestock, terms in 2018 were 10 to 12 months longer compared to 2000-2010. While the annual obligation is less, the number of years obligated has increased.
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