In the third quarter of 2023, agricultural credit conditions in the Kansas City Fed’s Tenth District showed signs of softening, with lower farm income and loan repayment rates compared to the previous year. This marked the second consecutive quarter of decline. The impact of this moderation was more evident in areas heavily affected by drought, while areas more focused on cattle production experienced a more tempered effect. Despite this softening in farm finances and a significant increase in interest rates, agricultural real estate values in the region remained stable.

The ag economy has been affected by a softening trend in recent quarters, which coincided with a moderation in commodity prices. The combination of elevated production costs and a decrease in the price of key products over the past year is likely to have contributed to a reduction in farm income in 2023. However, despite these challenges, the performance of agricultural loans has remained strong due to the solid financial position cultivated over the past two years.

This shift comes after two years of substantial improvement that had been bolstering loan performance. Agricultural lenders have seen an upturn in loan demand as farmers look to invest in their operations and take advantage of favorable interest rates. However, rising production costs have put pressure on margins, making it challenging for some farmers to maintain profitability.

Overall, while agricultural credit conditions show signs of softening, there are still opportunities for growth and investment within the sector. Agricultural lenders will need to remain vigilant and adapt to changing market conditions while continuing to provide support to farmers facing tough economic challenges.