Farm incomes held up through harvest season

“Good prices, dry conditions, higher interest rates,” commented a South Dakota banker, succinctly describing the state of agriculture in much of the Ninth District at harvest time. Crop prices continued to drive income growth in the Ninth District from July through September 2022 relative to the same period a year earlier, according to the Federal Reserve Bank of Minneapolis’ third-quarter agricultural credit conditions survey, conducted in October.

Spending on capital equipment and farm household purchases also increased on balance. Loan demand decreased, while incomes supported a higher rate of loan repayment, and renewals and extensions largely held steady. Land values and cash rents continued to increase across district states, even as interest rates on loans increased substantially over the previous quarter. Despite impacts of ongoing drought, the outlook for the fourth quarter is moderately optimistic, with lenders in the district mostly expecting farm incomes to increase.

Farm income, household spending, and capital investment

“Good crops and higher commodity prices are putting more cash in the farmers’ pockets,” wrote a Minnesota lender, whose sentiments were broadly reflected in the survey. Districtwide, 73 percent of agricultural lenders surveyed said incomes increased in the third quarter from a year earlier, while another 19 percent reported no change (see chart). More than half of respondents indicated that spending by farm households increased, while 40 percent reported no change. Capital spending came in slightly more moderate: A slightly higher proportion (42 percent) reported unchanged spending on buildings and equipment than reported increased spending (40 percent) from a year ago.

Loan repayments and renewals

The rate of repayment on agricultural loans increased on balance, reflecting continued improvement in farm finances, while renewals largely held steady. Loan repayments were unchanged from a year earlier according to 53 percent of respondents, while 43 percent reported that repayment rates increased. More than three-quarters of lenders stated that the number of renewals or extensions were unchanged, while 12 percent said renewal activity was down. No banks reported having refused a loan due to a shortage of funds.

Demand for loans, required collateral, and interest rates

Demand for loans decreased on balance, according to lenders, with 45 percent reporting lower loan demand relative to a year ago. By contrast, 27 percent noted increased loan demand. Collateral requirements on loans were unchanged according to 92 percent of lenders surveyed, with most of the balance reporting increases in collateral requirements. Interest rates for all loan categories in the survey continued to increase.

Cash rents and land values

Land values and cash rents jumped again in the third quarter after growing strongly in the previous survey. Ninth District nonirrigated cropland values increased by 20 percent on average from the third quarter of 2021. Values for irrigated land increased by 15 percent, while ranchland and pastureland values increased almost 20 percent. Land rents followed suit, as the district average cash rent for nonirrigated land increased by 11 percent from a year ago. Rents for irrigated land grew by 13 percent while ranchland rents jumped 4 percent.

Outlook

Lenders had generally positive forecasts for the remainder of 2022. Across the district, more than half of bankers expected that farm incomes will increase in the fourth quarter, compared with 8 percent who expected decreased incomes. The outlooks for farm household and capital spending were up on balance, though more than half of respondents expected no change in spending. Likely as a result of the strong cash position and the moderate spending outlook, nearly half of respondents projected demand for loans to decrease in the final three months of the year, while only 15 percent expected decreased loan demand. More than half of lenders anticipated loan repayment rates to increase, and more than three-quarters expected no change in renewals and extensions.

However, respondents continued to report concerns about soaring input costs. “Farmers are knowing that input expenses will remain high for the coming year and will retain some cash for that,” said one Minnesota lender. “Inflation [is] still the bigger worry along with rising interest rates.”