Farm Real Estate Loan Delinquencies Reach New Low
Despite falling net farm incomes, rising interest expenses, and generally low producer sentiment, farm loan delinquencies improved in 2023.
Farm real estate loan delinquencies
Across all commercial banks, the share of farm real estate loans classified as delinquent fell to just 0.91% in the fourth quarter of 2023 (Figure 1). The Kansas City Federal Reserve has reported quarterly activity for farm real estate loans since 1991. Figure 1 shows only fourth-quarter data so that the most recent observations (Q4 2023) can be compared with historical data from the same period. Fourth-quarter loan performance in 2023 bested the previous record low, 0.95% in 2022.
Previous low points in farm real estate delinquency rates were from 2005 to 2007 and 2014 to 2015. It’s worth noting that loan delinquencies at those times dipped to around 1.5%. The current dip, with delinquency rates below 1%, is uncommon.
The average fourth-quarterly delinquency rate has been 2.2% since 1991. However, farm real estate deficiencies have not been meaningfully above the long-run average since 2012.
Figure 1. Share of Farm Real Estate Loans Delinquent, Q4 1991-2023. Average: 2.2% (Shown in black). Data Source: KC Federal Reserve and AEI.ag Calculations.
Farm non-real estate loan delinquencies
Non-real estate farm loan data have been reported since 1987 (Figure 2). Delinquency rates for these loans also fell in 2023, reaching 0.71%. While also historically low and below the long-run average (2.0%), the low water mark for non-real estate delinquencies is 0.59%, observed in 2014.
This data set extends far enough back to capture the final years of the farm financial crisis. In 1987, 6.5% of non-real estate loans were delinquent. Conditions sharply improved to just 4.5% in 1988, but conditions remained at or above 2% throughout the 1990s.
Figure 2. Share of Farm Real Estate Loans Delinquent, Q4 1987-2023. Average: 2.0% (Shown in black). Data Source: KC Federal Reserve and AEI.ag Calculations.
Real estate vs non-real estate
A not always intuitive trend is that non-real estate farm loans have a lower delinquency rate than farm real estate loans (Figure 3). Since 1991, non-real estate delinquencies have been lower by an average of 0.49 percentage points. The annual difference varies and was especially wide between 2010 and 2018. More recently, the gap has been very narrow. For instance, at the end of 2022, the difference was only 0.1 percentage points; in 2023, it was 0.2 percentage points.
One major difference between real estate and non-real estate loans is the repayment period. Livestock and machinery loans are typically repaid in a few years while operating lines of credit are around a year. Real estate loans have extended repayment periods. This is significant because the number of things that could go wrong between initial loan approval and the final repayment can be greater with long-term loans.
Figure 3. Share of Farm Loans Delinquent – Non-Real Estate and Real Estate. Q4, 1991-2023. Data Source: KC Federal Reserve and AEI.ag Calculations.
Wrapping it up
Several measures of financial stress exist in the farm economy. Because the data is timely and captures a broad range of financial stresses — not just entities that have entered bankruptcy, for example — we believe delinquencies are a valuable measure of farm financial health.
Despite all the possible sources of bad news, farm loan performance improved in 2023 and was at or near historic lows. While some small share of farm loans is always in a difficult situation, the overall situation is encouraging.
Nobody knows how long the strong loan performance will continue, but history tells us that conditions can rapidly change. The share of delinquent farm real estate loans jumped 71 basis points in 2008, followed by a 108-basis point increase in 2009. Performance went from historic lows (1.45% in 2007) to 20-year highs (3.46% in 2010) in just a few years. Even with a starting point at or near record lows, an upturn in delinquencies could push conditions above the long-run average in just a few short years.
Finally, farm loan delinquency rates are another example of needing decades of data to answer “what is normal?” For example, if we only considered the last 5 or 10 years of farm real estate data, the highest observation is 2.2%, which coincidentally is the 33-year average. Alternatively, if we only considered data between 1991 and the early 2000s, loan performance was consistently above 2%. These trends are even more dramatic if the 1980s are considered, which non-real estate loan data partially captured.