Agricultural producers finish tough 2013; farm incomes down and land values weaken

Tough weather during the growing season didn’t hit farmers as hard as expected, but falling crop prices took their toll. Farm incomes and capital spending decreased, according to lenders responding to the Minneapolis Fed’s fourth-quarter (January) agricultural credit conditions survey. Falling incomes led to a decrease in loan repayments, while renewals and extensions held steady. Loan demand increased slightly. Meanwhile, the rapid growth of farmland values abated, with prices even falling in some areas. The outlook for the first quarter of 2014 is modest, with survey respondents predicting further decreases in incomes, capital expenditures and household spending.

Farm income, household spending and capital investment

A Minnesota banker summed up the picture for farm incomes: “Dry, hot summer, but still managed to produce above-average yields in most crops. Lower commodity prices [are] straining cash flows for 2014.” The trend of falling farm incomes accelerated from the third quarter. More than half of lenders said that farm income decreased in the fourth quarter, while only 12 percent reported increases. Incomes performed the worst in Minnesota, where 65 percent of lenders reported decreases and none said incomes increased. Montana, where incomes were flat on average, fared the best. As indicated by expectations from the previous survey, 40 percent of lenders said capital spending by agricultural producers fell in the fourth quarter and another 45 percent reported that it was flat. Farm household held steady, with 71 percent of respondents reporting no change and slightly more reporting increases than decreases.

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Loan repayments and renewals

Consistent with falling incomes, loan repayment rates decreased slightly, while renewals mostly held steady. About 19 percent of the lenders responding to the survey reported a lower rate of loan repayments, while 67 percent reported that they held steady. A strong majority of lenders, 81 percent, reported no change in the number of loan renewals or extensions.

Demand for loans, required collateral and interest rates

Loan demand was up slightly; nearly a quarter of respondents said demand increased from the previous three months, while 60 percent noted no change. A South Dakota lender offered an explanation: “Many farmers are holding off selling commodities until after the new year, creating higher loan volume as they try to avoid paying too much tax.” This was generally consistent across district states, but in Wisconsin demand fell slightly, on balance. None of the banks surveyed reported refusing a loan because of fund shortages. Fixed and variable interest rates on loans for operating, machinery and real-estate fell from their third-quarter levels.

Cash rents and land values

Continuing a trend from the previous quarter, growth in farmland values moderated somewhat in the final three months of 2013, even decreasing in some cases, with cash rents following suit. The district’s average cash rents and land values for nonirrigated land, irrigated land and ranchland all increased from the previous year, but at a slower pace than the double-digit growth seen in recent years; cash rents for all three classes fell from the previous quarter districtwide. Nonirrigated farmland saw the smallest gains, with the district average for rents increasing less than 1 percent over last year and the average value increasing 4.4 percent. Increases for irrigated farmland and ranchland values were similar, with values increasing 4.7 percent and 5 percent and rents up 4.1 and 3.4 percent, respectively. In Minnesota, land values fell slightly for all categories from the previous year, dropping 2 percent for nonirrigated cropland and 5 percent for ranchland. But price appreciation generally continued in other states, in some cases dramatically—irrigated North Dakota cropland saw the biggest increased at 23.7 percent.

Outlook

In keeping with recent trends, expectations for the first quarter of this year are modest. “2014 [is] expected to be less profitable, with rents, seed and equipment remaining high while commodity prices [are] expected to be low,” noted a South Dakota banker. Nearly two-thirds of lenders responding to the survey predict that farm income will decrease in the first quarter of 2014, and nearly the same percentage expect capital spending to fall. Respondents were slightly less pessimistic on household spending—55 percent think it won’t change and 35 percent expect decreases. Lenders expect loan demand to increase and repayment rates to stay roughly flat, while they expect renewals and collateral requirements to increase slightly.

Percent of respondents who reported decreased levels for the past three months compared with the same period last year:

Percent of respondents who reported increased levels for the past three months compared with the same period last year:

Note: The Upper Peninsula of Michigan is not part of the survey.

Percent of respondents who expect decreased levels for the next three months:

Percent of respondents who expect increased levels for the next three months:

Note: The Upper Peninsula of Michigan is not part of the survey.

Appendix:

• Agricultural Interest Rates