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Article Highlights
- Most community banks originating agricultural loans have repricing farmland-secured loans in their loan portfolio
- One-third of farmland loans at community banks will reprice in 2024
- Farmland loans that reprice at higher interest rates result in more challenging debt service
Interest rates for farmland loans increased dramatically since 2021, according to recent agricultural credit survey results. Rising nearly 4 percent in the last three years, farmland interest rates, the survey shows, are at the highest levels since August 2009.1 The interest rates for farmland loans almost doubled in two years, which is the fastest they have increased in the survey’s history.
This article explores data from the quarterly agricultural credit conditions survey conducted by the Federal Reserve Bank of Minneapolis. The data collected during the survey provides information related to the share of repricing farmland loans and the share of farmland loans expected to reprice at elevated interest rates at community banks.2 This information is important because it can provide us with an estimate on how many farmers may have their farmland loans reprice at a higher interest rate.
This article is the third of four in the series on the impacts of higher interest rates on agricultural borrowers and agricultural lending. The previous two articles highlighted increasing interest expenses for agricultural production loans and the impact of higher interest rates on highly leveraged borrowers. The final article will focus on the least-profitable agricultural producers and their repayment ability after farmland loans reprice.
What is loan repricing?
Loan repricing occurs when a borrower’s interest rate resets due to loan maturity or terms in a loan agreement, such as an adjustable-rate loan. When a loan reprices, the interest rate for the renewed loan reflects the current market conditions and any changes in the borrower’s creditworthiness. For farmland loans that reprice, the terms in the loan agreement dictate the interest rate and the frequency of interest rate changes. For example, when the fixed period of an adjustable-rate mortgage ends, the loan enters the adjustable period, where the interest rate changes following the terms outlined in the loan agreement.
At community banks, we typically see farmland loans with five-year terms and balloon payments at maturity. The borrower pays off the existing loan with the proceeds from the loan renewal, which then pays off the balloon payment for the maturing loan. Figure 1 provides an example of typical farmland loan repricing at a community bank.
| Date | Loan amount | Interest rate | Loan term (years) | Annual payment | Principal paid over loan term | |
|---|---|---|---|---|---|---|
| Loan at origination | Jan. 1, 2019 | $500,000 | 5.0% | 5 | $32,526 | $41,584 |
| Loan at renewal or after fixed-rate period | Jan. 1, 2024 | $458,416 | 8.5% | 5 | $42,656 | $21,868 |
How common are repricing farmland loans?
The survey provided insight into the percentage of repricing farmland loans originated at Ninth District community banks. According to the survey results, most community banks originating agricultural loans have repricing farmland-secured loans in their loan portfolio. Banks responded by estimating the share of farmland loans in their loan portfolio that will reprice. Figure 2 includes the survey results.
Of the banks that responded to the survey, less than one-quarter stated that there are no farmland loans with a repricing feature in their portfolio. At approximately one-third of banks, these loans comprise less than half of the loan portfolio. At the remaining banks, they make up a majority of their loan portfolio. This information provides us with a good baseline on the composition of repricing farmland loans in the Ninth District.
When do these farmland loans reprice?
Aggregate data on the timing of farmland loan repricing is difficult to locate. In the same survey, we asked the community banks to estimate what percent of the farmland loans in their portfolio will reprice in a specific period. Most of the respondents stated that more than half of their farmland loans would reprice after the next 12 months. Figure 3 includes the survey results related to the timing of farmland loan repricing.
How many farmland loans will reprice in 2024?
Based on the survey responses, we know that about one-third of farmland loans will reprice in 2024, and we can estimate the dollar amount of farmland loans that will reprice using call report data. At year-end 2023, farmland loans outstanding at Ninth District community banks totaled $12.4 billion. Combined with the repricing information from the quarterly ag credit survey results, we estimate about $4 billion in farmland loans will reprice in 2024 (32.4 percent of $12.4 billion).
Loan repricing effects on debt service
The rise in interest rates has caused agricultural borrowers and banks to closely monitor debt service after loan repricing. From 2008 to mid-2022, debt service after loan repricing was of minimal concern because interest rates were low and stable, resulting in steady payment streams. Since mid-2022, interest rates have been elevated and farmland loans have repriced at higher rates resulting in a more challenging environment to service debt.
The survey provides insight into how repricing farmland loans can affect debt repayment capacity in the district. The next and final article in this interest rate–related series will examine the impacts of rising interest rates on the least-profitable agricultural producers and their repayment ability after loan repricing.
Endnotes
1 Agricultural credit conditions survey data include quarterly interest rate data starting in the first quarter of 2001.
2 For this article, community banks are those headquartered in the Ninth District with less than $10 billion in assets.
