MODERATING feed prices in the first quarter of 2013 offered a light at the end of the tunnel for livestock producers and for the nation's agricultural lenders.
Commercial lending to livestock producers soared in the first quarter, coming on the heels of record overall agricultural lending in 2012.
According to a February survey of national commercial banks conducted by the Federal Reserve Bank of Kansas City, bank lending for livestock purchases reached the highest level in almost a decade. As the profit potential of feeding returned, agricultural lending activity increased 9% from the same period in 2012.
While farm loan delinquency rates continued to fall during the fourth quarter of 2012, trending near historically low levels, farm debt outstanding at all commercial banks grew almost 5%, the largest year-over-year jump since early 2009. In particular, high input costs and a surge in farm machinery purchases drove non-real estate farm loan volumes.
Similarly, current operating loans jumped in the first quarter as winter feeding costs remained stiff and the crop sector paid higher input costs for fertilizer and seed (Figure).
Overall, 2012 saw a major increase in agricultural lending despite a troubled economy. The American Bankers Assn.'s annual "Farm Bank Performance Report" found that farm and ranch lending grew 13.9%, or roughly $10 billion.
Furthermore, agricultural bankers held $81.8 billion in farm loans at year-end, and 67% of the nation's 2,215 farm banks reported an increase in earnings last year.
Likewise, the Farm Credit System (FCS) reported a growth in net income for the year of $4.118 billion, compared with $3.940 billion in 2011. The strong performance came from an increase in net interest income and a decrease in the provision for loan losses.
In 2012, gross FCS loans grew 9.9% — roughly $17.2 billion — for a total portfolio of $191.9 billion across the system. The increase was driven primarily by growth in real estate mortgage lending, although operating loans swelled in the fourth quarter as farmers began paying for 2013 crop inputs.
Perhaps the biggest economic story of the first quarter is the overall improvement in prospects for livestock production.
According to the CoBank "Quarterly Rural Economic Review," the smallest cattle inventory since 1952 created market growth opportunities for the pork and poultry sectors, both of which have avoided major liquidation cycles.
Despite record feed costs, the review notes that feed use in the animal protein sector dipped only 2% during the quarter. However, a subpar grain crop this year would force livestock producers to "realign their operations accordingly," it added.
Beef producers, it turns out, may be the odd man out when it comes to improving economic conditions.
Purdue University economist Chris Hurt noted that pork producers should return to profitability this spring due to lower feed costs, and CoBank found that poultry producers are currently operating at a profit.
CoBank estimated that packer margins in the beef sector, on the other hand, dropped more than 20% in February, falling from already depressed levels.
"Although retail beef prices are at record highs, processors have been unable to pass the full cost of beef production on to the consumer," CoBank said.
The good news for protein producers in general, according to one agricultural economist, is that the future is bright. Increased demand for meat in developing countries and flattening demand for corn-based ethanol will benefit the livestock sector, according to Purdue's Farzad Taheripour.
"Due to consumer taste preferences, global growth in income and population, the livestock industry will grow, particularly toward poultry and pork," he said. "The demand for poultry and pork will increase significantly."
Increased demand for meat in China and India, with their booming populations and increasing affluence, will demand more pork and beef in the years to come.
Meanwhile, Taheripour said increased grain production efficiency and hitting the ethanol "blend wall" will lead to lower feed costs.