The volume of new farm loans dropped sharply in the fourth quarter of 2016, according to the latest "Ag Finance Databook" by the Federal Reserve Bank of Kansas City, Mo.

The data are derived from respondents to the "Survey of Terms of Bank Lending to Farmers," which asks bankers about new loans to farmers. The survey found that volume of non-real estate loans in the farm sector dropped 40% from a year ago, the largest year-over-year decline in nearly 20 years.

“However, as the outlook for farm income generally has remained weak and farmland values have continued to decline, both lenders and borrowers may have been more apprehensive about adding new debt heading into 2017,” the quarterly report noted.

Nathan Kauffman, Fed assistant vice president and executive of the Omaha, Neb., branch and Matt Clark, Fed assistant economist, wrote that the 30% year-over-year drop in the price of feeder cattle helped reduce the cost of purchasing the animals and likely contributed to the sharp reduction in loan volumes in the livestock sector.

Kauffman and Clark wrote that some of the reduced loan volume likely stemmed from lower costs of farm inputs, as the costs of seeds, fertilizer and cash rents were all down from a year ago, which likely was a “significant factor” in reducing the volume of loans used to finance operating expenses. The U.S. Department of Agriculture estimated that the cost of cash rent, fertilizer and seed accounted for more than 60% of the total cost of corn production in 2016.

“Because loans used for operating expenses comprise about 60% of non-real estate loan volume, the decline in input expenses likely curbed the volume of new farm loans originated in the fourth quarter as farmers prepared for the 2017 planting season,” the Kansas City Fed report noted.

Banks are taking steps to avoid past-due payments and help producers who face short-term cash flow shortages. Bankers extended the maturities for feeder livestock, other livestock and farm machinery loans by 16%, 42% and 13%, respectively.

Although the volume of new loans has dropped, a slower rate of loan repayments has actually brought about an increase in farm sector debt at commercial banks.

“In addition to loan demand, demand for loan renewals and extensions also has continued to rise,” the authors noted, adding that "the share of bankers that reported an increase in loan renewals and extensions was the highest in survey history" for the Kansas City, Chicago, Ill.; Minneapolis, Minn., and St. Louis, Mo., districts as well as the highest since 2001 in the Dallas, Texas, district.

Agricultural lenders and borrowers are increasingly cautious. “If profit margins remain low through 2017, the pace of new debt will be a key indicator to monitor in assessing the severity of financial stress through the year,” the report said.