2021 ended strong for farmers

Faster price growth has been a double-edged sword for farmers and animal producers across the Ninth District. While they were paying more for inputs like fuel and equipment, they were also able to sell commodities for higher prices. Those higher output prices appeared to have outweighed rising input costs, at least through the end of last year, according to the latest survey of farm bankers from the Federal Reserve Bank of Minneapolis.

Farm incomes overwhelmingly increased in the fourth quarter of 2021, according to lenders responding to the Minneapolis Fed’s fourth-quarter (January) agricultural credit conditions survey. The bump in incomes also led to increased loan repayment rates, while loan demand, renewals, and extensions decreased. Farmland values increased rapidly from a year earlier, and cash rents jumped as well. While lenders were concerned about soaring input prices, the outlook for the beginning of 2022 remained positive, with survey respondents predicting further growth in farm incomes and spending.

Farm income, household spending, and capital investment

“Most customers have achieved good positive earned net worth gains and good increases to working capital,” a South Dakota banker commented. “Most of this is due to higher grain and cattle prices as well as stimulus money.”

Most of their colleagues around the region agreed, as nearly 9 in 10 lenders responding to the survey reported that farm incomes increased in the fourth quarter of 2021 compared with the same period a year earlier. Only 4 percent said incomes declined (see chart). Two-thirds of lenders said spending by farm households increased in the fourth quarter, with most of the reminder reporting that it was flat, while 70 percent indicated that capital spending by agricultural producers increased.

Loan repayments and renewals

Consistent with improved financial conditions, loan repayment rates increased, while renewal activity was down. Nearly two-thirds of lenders responding to the survey reported a greater rate of loan repayment from a year earlier, while an additional 36 percent said that repayment rates held steady. A third of respondents indicated that loan renewal or extension activity was lower, while 58 percent noted that renewals were unchanged.

Demand for loans, required collateral, and interest rates

With incomes up, demand for loans fell from a year earlier for 42 percent of bankers, while 28 percent reported an increase in loan demand. Fixed interest rates on operating, machinery, and real estate loans each increased slightly on average from their third-quarter levels, according to respondents. Variable rates fell for operating loans, held steady for machinery, and increased for real estate. Nearly all lenders reported no change in collateral requirements on loans, though 2 percent said requirements increased.

Cash rents and land values

“Land sales have been strong this fall due to strong crop yields, higher commodity prices, and strong investor interest in purchasing farmland,” wrote a South Dakota lender. Following a year of growth, cropland values surged in the final three months of 2021, and cash rents also increased. Nonirrigated cropland values increased 27 percent on average across the district compared with a year earlier, while cash rents for that land increased more than 14 percent over 2020.

Irrigated farmland values rose 20 percent on average, while ranchland values rose 19 percent. Land value increases were large across district states, but a lender in Montana noted that migration was playing a role there. “Montana is flooded with out-of-state money moving in and it is hurting local farmers and ranchers by increasing land prices, lease prices and often ending lease opportunities.”

Outlook

Despite continued income growth, lenders were worried about the effects of inflation going forward. In response to a special survey question that asked lenders about their top concern for agricultural producers in 2022, 64 percent pointed to input cost and/or availability. The next most common concern—commodity price volatility—was selected by 13 percent of lenders, while 9 percent were worried about weather or climate events (including drought).

Even so, outlooks heading into the new year were generally optimistic. Two-thirds of ag bankers predicted that farm income will increase in the first quarter of 2022, while a quarter expected stable income. The outlooks for capital investment and household spending were also positive, with more than half of respondents anticipating each to increase. Expectations call for increased demand for loans on balance in the upcoming quarter. The outlook for loan repayment was also greater on balance, while renewals and extensions were broadly expected to remain steady.

Increasing interest rates may have been a reason more lenders were expecting growth in loan volumes despite greater cash on hand. As a Minnesota banker noted, “significant pressure from ag producers to take fixed rates for as long as possible. They are concerned about inflation and the potential for interest rate increases.”