Federal Reserve Ag Credit Surveys- 2018 Fourth Quarter Farm Economy Conditions

Last week, the Federal Reserve Banks of Chicago, St. Louis, Kansas City, and Minneapolis released updates regarding farm income, farmland values and agricultural credit conditions from the fourth quarter of 2018. Today’s update highlights core findings from the Fed reports.

Federal Reserve Bank of Chicago

David Oppedahl, a Senior Business Economist at the Chicago Fed, explained in The AgLetter that, “For 2018, annual farmland values in the Seventh Federal Reserve District were steady overall. Yet, values for ‘good’ agricultural land in the fourth quarter of 2018 were up 1 percent from the third quarter, according to 183 survey respondents representing agricultural banks across the District. Although 75 percent of the responding agricultural bankers expected farmland values to be stable during the January through March period of 2019, nearly all of the rest expected farmland values to move down.”

The AgLetter noted that, “After accounting for inflation, the District actually experienced a yearly decrease of 2 percent in farmland values for 2018 (see chart 1). This was the fifth straight annual real decline in District farmland values—the longest downturn since the 1980s.  The District’s farmland values fell 13 percent in real terms from their peak in 2013 to the end of 2018. But the decrease in agricultural land values over this span was just 6 percent in nominal terms (see chart 2).

In addition, Thursday’s update noted that, “An Iowa banker remarked, ‘The soybean payment as a result of the tariffs is a big help.’ Under the Market Facilitation Program (MFP) administered by the USDA’s Farm Service Agency (FSA), soybean prices would essentially be raised by $1.65 per bushel (whereas corn prices would be bumped up only a penny per bushel). Given that 40 percent of 2018 soybean production was based in the District states, farm income in these five states should get an outsized boost from MFP payments.”

With respect to interest rates, the Chicago Fed stated that, “Some bankers linked financial difficulties to pressures from higher agricultural interest rates. An Iowa banker said, ‘The rising interest rate environment is beginning to cause repayment problems.’ As of January 1, 2019, the average interest rates for farm operating loans (6.07 percent) and feeder cattle loans (6.13 percent) were at their highest levels since the second and third quarters of 2010, respectively. The average interest rate for agricultural real estate loans (5.61 percent) was last higher during the second quarter of 2011.”

Federal Reserve Bank of St. Louis

The Agricultural Finance Monitor stated on Thursday, “For the twentieth consecutive quarter, a majority of agricultural bankers in the Eighth Federal Reserve District reported that farm income had declined in the fourth quarter of 2018 compared with a year earlier. Proportionately more bankers also reported that farm household spending and capital expenditures remained below year-earlier levels in the fourth quarter. Bankers expect similar conditions to prevail for these three indicators in the first quarter of 2019.”

With respect to land values and cash rental rates, The Monitor noted that,

Quality farmland values rose 3.4 percent in the fourth quarter from a year earlier, a modest acceleration from the 2.5 percent increase registered in the third quarter…[and]…Cash rents for quality farmland rose 2.9 percent in the fourth quarter, following a 2 percent gain in the third quarter.

The St. Louis Fed also indicated that, “Table 5 shows average interest rates on a variety of fixed- and variable-rate loan types in the third and fourth quarters of 2018. Compared with the previous quarter, interest rates increased across all listed loan types in the fourth quarter.”

Federal Reserve Bank of Kansas City

Cortney Cowley and Ty Kreitman, writing in Thursday’s Ag Credit Survey from the Kansas City Fed, noted that, “Farmland values remained stable in the fourth quarter, according to the Tenth District Survey of Agricultural Credit Conditions. Declines in the value of nonirrigated and irrigated cropland remained modest across the District, and declined only 3 percent from last year (Chart 1). On average, cropland values also declined at a slower pace in 2018 than in the previous two years.”

The Survey pointed out that, “Increases in interest rates in recent years also could weigh on farmland values. Higher interest rates have increased the financing costs of land purchases slightly and could signal higher returns on alternative investments. At the same time, stable farmland values and lower cash rents have led to lower capitalization rates (Chart 5). As interest rates have increased, they have diverged from capitalization rates on farm real estate, and this divergence intensified in 2018. As interest expenses on new land purchases have increased amid flat returns, demand for farmland, and hence farmland values, could decline.”

The Kansas City Fed also pointed out that,

Amid persistent stress in the agricultural economy, farm income and borrower spending continued to decline. Farm income in the fourth quarter declined for the sixth consecutive year, according to respondents throughout the Tenth District (Chart 7).

“Bankers also indicated they expected farm income to remain weak in the first quarter of 2019.”

In summary, Thursday’s report noted that, “Even as risks to recent stability in farm real estate markets mounted through the end of 2018, the value of farmland continued to provide ongoing support to the farm sector and remained a key factor to monitor in 2019.”

Federal Reserve Bank of Minneapolis

Also last week, the Minneapolis Fed indicated in its Fourth-Quarter 2018 Agricultural Credit Conditions Survey that, “The story has become a familiar one: Farmers in most areas of the Ninth District had good growing conditions and strong yields in 2018, but low crop prices held farm incomes down and put pressure on finances.

‘We are seeing the economic stress rising significantly,’ said a rural banker in Minnesota. ‘Producers are dealing with multiple years of economic pressure, and we are seeing more operations ‘throwing in the towel.’’

“Farm incomes and capital spending continued to decrease at the end of 2018, according to lenders responding to the Minneapolis Fed’s fourth-quarter (January) agricultural credit conditions survey. Falling incomes also led to decreased loan repayment rates, while loan demand, renewals, and extensions increased. Farmland values declined slightly on average, while cash rents were more stable. The outlook for the beginning of 2019 is pessimistic, with survey respondents predicting a further decline in income and capital spending.”

The report stated that, “Given the role of strong harvests in bolstering farm incomes, some lenders expressed concerns about that luck running out. ‘A year of average yields with current commodity pricing would be very detrimental to our area’s farm operations,’ a Minnesota banker commented.”