WASHINGTON, D.C. — Agriculture-related lending by farm banks to ranchers and farmers increased by nearly 14 percent last year, according to a recent report from the American Bankers Assoc. (ABA). The growth indicates continued confidence in the agricultural economy by those financial institutions, an official with the organization said.

The nation’s 2,215 farm banks held $81.8 billion in agricultural loans at the end of 2012, up 13.9 percent, or $10 billion, from 2011, said John Blanchard, the ABA’s senior vice president and director of its Center for Agricultural and Rural Banking.

“The farm economy has been powered by high commodity prices,” he explained. “The willingness of banks to make loans is based on a farmer’s ability to pay (them off). The ag economy is performing pretty well and confidence levels are very high.”

Blanchard wasn’t surprised by the increase because farmers made a lot of capital purchases in the latter portion of 2012. Farmers bought equipment, possibly in advance of changes in tax laws, or decided to pre-pay on inputs for 2013, he noted.

“2012 turned out to be a pretty good year and these purchases caused a significant demand in credit in the last quarter of the year,” he said. “They weren’t just in a buying frenzy to avoid taxes, though. Some made improvements to their land, such as installing tile or conservation practices.”

The amount of lending by farm banks to ranchers and farmers has increased steadily since about 1989, Blanchard said. The last time farm lending went down sharply was in the 1980s, he added.

Farm banks are defined by the ABA as FDIC (Federal Deposit Insurance Corp.) insured banks whose ratio of domestic farm loans to total domestic loans was greater than or equal to 13.96 percent for 2012. The lending figures were included in the ABA’s Farm Bank Performance Report released last month.

The banks included in the report aren’t the only ones that make loans to farmers and ranchers, Blanchard explained. Banks such as Wells Fargo and Lake City Bank are huge agricultural lenders, but don’t come close to the 13.96 percent ratio to be considered a farm bank, he said.

Lending to farmers by Ossian State Bank in Ossian, Ind., increased over the past year, especially in loans for farmland, said David Morrison, bank president.

“There have been a lot of farmland sales and a lot of loans have been connected to that,” he noted. “As for loans for production costs, some farmers won’t need as much money as in the past. Some of them have reduced the requirement for how much they’ll need.

“Because they’ve had a good year financially, they can cover more of their expenses themselves.”

Area farmers seem pretty confident going into this year’s growing season, Morrison said. They think prices for their crops will hold up fairly well, though they also see input costs continuing to rise.

Whether farm banks loan more for land or production costs varies by the region of the country, Blanchard said.

The Corn Belt, which includes Illinois, Indiana, Iowa, Michigan and Ohio, saw farm loans increase by 15.6 percent to $35.6 billion, from 2011 to 2012. Production loans were up 17.6 percent to $16.7 billion, while farmland loans increased 13.8 percent to $18.9 billion.

In the Southern region, which includes Kentucky and Tennessee, farm loans were up 3.7 percent to $6.1 billion. Farmland loans were up 5.1 percent to $4.6 billion, while production loans fell 0.1 percent.

For Illinois, total farm loans from farm banks were up 8 percent to $6 billion; Indiana’s were up 25 percent to $1.9 billion; Iowa, up 11 percent to $12.9 billion; Kentucky, up 3 percent to $1 billion; Michigan, up 9 percent to $381 million; Ohio, up 14 percent to $1 billion; and Tennessee, up 3 percent to $318 million.

Blanchard cautioned farmers not to put all of their liquidity into non-liquid assets such as land and machinery.

“Liquidity tides them over when prices are lower,” he said. “They should retain some liquidity as a shock absorber against lower prices. Cash is still important and having cash is not a bad thing.”

While the number of loans done by a farm bank depends on the agricultural economy, Blanchard said the basics of lending remain true. “The farmers’ ability to repay their loans continues to be the thing banks look at when making a loan,” he noted. “They need to have cash flow and collateral.”

The ABA report also looked at the number of those employed by farm banks. In 2012, employment was up 4.2 percent nationally, to nearly 91,000 people. In the Corn Belt, workers totaled more than 37,200, up 4.8 percent. Farm banks in the South had more than 11,200 employees, up 1.4 percent.

The complete report is available at www.aba.com