Strong capital spending and investments boosted agricultural lending at commercial banks in the first half of 2012, according to the Federal Reserve System’s Agricultural Finance Databook.

During the first quarter, commercial banks reported a 1.4% increase in total agricultural loan volume, led by stronger gains in non-real estate farm loans. A national survey of agricultural loans pointed to additional gains in the second quarter as the volume of non-real estate farm loans issued during the first full week of May were almost 3 percent higher than year-ago levels.

Strong farm incomes pushed farmland values higher. For the second straight year, many states in the Corn Belt and northern Plains reported double-digit annual gains in farmland values.

At the same time, agricultural bank profits strengthened. During the first quarter, returns on assets and equity improved at agricultural banks. Rising farm loan repayment rates cut delinquency rates and net charge-offs on agricultural loans, and the average risk rating on agricultural loans eased further.

Nevertheless, bankers commented on the challenges in expanding profits. Sluggish operating loans were contributing to relatively low loan-to-deposit ratios at agricultural banks. Competition for qualified farm loans intensified among commercial banks, Farm Credit associations and vendor financiers.

The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data. The complete release is available at www.kansascityfed.org/research/indicatorsdata/agfinance. For additional research on the agricultural economy from the Federal Reserve Bank of Kansas City, visit www.kansascityfed.org/research/regionaleconomy/agriculture.cfm.