Ag economist Brent Gloy has been watching the farm economy closely – in particular, banker attitudes about agricultural credit conditions. They’ve shown some signs of improvement since late 2015, but there’s still ample evidence of credit concerns, he says.
In particular, Gloy looked at two Federal Reserve district reports from Kansas City and Chicago that measure something called a “diffusion index.” In layperson’s terms, these indexes measure the condition of loan repayment rates on a scale of 0 to 200.
In the first quarter of 2016, the Chicago diffusion index was the lowest it had ever been, at 32. Banker sentiment toward repayment rates has since risen to 48, he notes.
“This is the highest that the index has stood since the third quarter of 2015,” Gloy notes in the blog Agricultural Economic Insights. “Although this is an improvement, it is important to remember that it hasn’t fallen this low except for a few times in the 1980s and once in 1999.”
Banker attitudes shifted sharply downward beginning in the third quarter of 2013, Gloy says.
“Overall, the sentiment toward repayment rates is quite negative,” he says.
At the same time, loan demands have been on the rise since the second half of 2013, Gloy points out. As a reaction to higher loan demands, coupled with worries over loan repayment rates, bankers have responded by increasing the amount of collateral they require to hold against loans.
“Overall, the results of the quarterly surveys of bankers are clear,” he says. “Bankers see increased loan demand, see loan repayment rates falling, and are adjusting collateral requirements accordingly. Given the income situation in agriculture, this is not surprising.”
Gloy sees two things in particular worth monitoring moving forward. First, he wants to know whether increases in interest rates will persist or whether it represents a “short-term gyration.” Also, he wants to know if actual repayment problems will become more prevalent.
“The bigger question is, will these problems become large enough to cause widespread credit problems in the ag sector?” he says. “In our opinion, they would have to increase substantially above recent levels to become problematic.”
For more of Gloy’s insights, visit http://ageconomists.com/.