Struggling district farmers buoyed by federal aid, lower interest rates

Despite years of persistently low commodity prices and the COVID-19 pandemic, the mood of some Ninth District agricultural bankers is surprisingly upbeat, according to a recent Federal Reserve Bank of Minneapolis survey. “Most farm customers [are] coping with low prices better than expected,” said a Wisconsin lender, one of several respondents reporting that federal aid programs and low interest rates have taken some stress off agricultural producers.

The Minneapolis Fed’s second-quarter agricultural credit conditions survey, conducted during July, indicated that farm incomes fell from April through June relative to the previous year. Spending on capital equipment and farm household purchases also decreased. Falling incomes pushed the rate of loan repayment down slightly, while renewals and extensions increased on balance. Farmland values continued to slide, while cash rents rose slightly.

The outlook for the third quarter was for continued contraction. However, a lot will depend on weather conditions through the end of the growing season.

Farm income, household spending, and capital investment

“Crops planted early this year and are looking good,” commented a South Dakota banker, one of several respondents who expressed optimism about growing conditions. However, low crop and livestock prices continued to exert downward pressure on farm income.

Most district lenders surveyed (85 percent) reported a decrease in farm incomes during the second quarter of 2020 compared with the same period in 2019. Just over three-quarters of respondents said capital spending by farming operations was down. Farm household spending was slightly more stable by comparison, as 43 percent of lenders reported that it remained flat, while 53 percent reported that it fell. Results on farm income and spending were largely similar across the district.

Loan repayments and renewals

Despite a difficult financial situation, the rate of repayment on agricultural loans held steady among most lenders, as did renewal activity. Nearly two-thirds of lenders surveyed said loan repayment rates were unchanged, while nearly all of the remainder reported a decline in repayments. A slight majority of lenders reported no change in the number of loan renewals or extensions, while 47 percent said renewal activity increased.

These results stand in contrast to other recent quarterly surveys in which most lenders reported decreased loan repayment. These relatively benign conditions may be due in part to federal emergency aid programs passed in response to the COVID-19 pandemic, according to results of a special question asked in the second-quarter survey. A strong majority of lenders surveyed—72 percent—said the Coronavirus Food Assistance Program provided “moderate support” to farm incomes and loan repayment, while 20 percent said it provided “significant support.” The Paycheck Protection Program was also helpful, as 62 percent of respondents said it provided moderate support and 14 percent, significant support.

Demand for loans, required collateral, and interest rates

Demand for credit rose somewhat in the second quarter, a likely result of falling incomes. A quarter of respondents indicated that loan demand increased, while 59 percent said it did not change. Collateral requirements were unchanged, according to a solid majority of lenders surveyed—78 percent. Continued declines in interest rates came as a source of relief. Average fixed and variable rates on operating, machinery, and real estate loans all decreased in the second quarter by at least 10 or more basis points on the heels of substantial decreases in the first quarter.

Cash rents and land values

The second-quarter results generally pointed to a moderate decrease in land prices, consistent with surveys since agricultural land values peaked in the middle of the last decade. Ninth District nonirrigated cropland values fell by 1.6 percent on average relative to a year earlier. Irrigated land values actually increased by 4 percent, according to lenders, while ranchland values were down less than 1 percent. The district average cash rent for nonirrigated land increased by 0.5 percent in the second quarter from a year ago. Ranchland rents increased 0.6 percent, while rents for irrigated land fell 1.5 percent.

Outlook

As always, the outlook for farmers depended on the weather. “Continued financial stability will depend upon 2020 crop yields and crop prices,” said a South Dakota lender.

Expectations for the remainder of the growing season were generally pessimistic. Across the district, 76 percent of lenders expected farm income to decrease in the third quarter of 2020, compared with 5 percent forecasting increases. The outlook for capital spending is similar, with 72 percent anticipating decreases, while 49 percent expect farm household spending to fall. Loan demand was generally forecast to rise in the upcoming quarter, with 43 percent of lenders expecting increases. While the outlook for loan repayment was lower on balance, more than 60 percent of respondents expected no change in repayment rates, and a strong majority were not planning to change collateral requirements.