Ag bankers across the Farm Belt expect the slump in farm income to persist through spring, with producers economizing on household spending and big-ticket purchases due to low commodity prices, according to reports by Federal Reserve banks in the Midwest and Plains.
Although credit conditions deteriorated during winter, a relatively small number of farmers and ranchers are in severe financial stress. “The erosion in the farm sector is continuing to reduce farm household expenditures and capital spending from year-earlier levels, as well as putting downward pressure on farmland values and cash rents,” said the St. Louis Federal Reserve Bank in a quarterly report.
Farmland values, which soared during the commodity boom of 2006-13, are ebbing from Michigan to Texas. The greatest declines were in the Corn Belt — good-quality farmland dropped in value 4 percent compared to a year ago, said the Chicago Federal Reserve, while the St. Louis Fed said quality farmland was down 6 percent. Declines were smaller in the Plains, said regional Feds in Kansas City and Dallas.
“Although cash rents declined modestly, production costs have remained high and many producers have reduced both capital and household spending in an effort to cut costs,” said the Kansas City Fed’s Ag Credit Survey. “Persistently low prices for commodities have weighed on gross revenue … keeping profit margins for crop producers relatively tight.”
Producers have pared their spending since 2014, said the Kansas City Fed. In its winter survey, “more than half of banks expected farm income, capital spending and household spending all would decline in the next three months.” The St. Louis Fed said in its survey, more bankers expected income to fall during the spring than believed there would be an upturn.
U.S. net farm income was expected to stabilize with a slight downward trend this year, according to a USDA estimate, following a two-year plunge of 57 percent from the record set in 2013.
Farm lenders taking part in the St. Louis Fed survey said 34 percent of their customers had borrowed up to their loan limit. Most of those lenders faced “minor repayment problems that can be remedied fairly easily,” said the regional Fed. Seven percent had major repayment problems and 2 percent rated as “severe repayment problems which will likely result in loan losses and/or require forced sales” of assets.
Farmland usually accounts for 80 percent of a farmer’s assets. “Moderating farmland values could … create additional concerns for lenders and borrowers, especially those who have become more highly leveraged,” said the Kansas City Fed. At present, it said, “delinquency rates on farm loans have remained low compared to historical standards and compared to delinquency rates on other types of loans outside of agriculture.”
The farmland market was slowing along with the overall agricultural economy, with less land offered for sale, said the Chicago Fed. “There were reports of some farms coming up for lease again this year after initial rental arrangements fell through.” Farmers are trying to “weather a downturn in agricultural prices by shoring up their cash flows and holding back on capital spending.”
Like other districts, the Dallas Fed said demand for agricultural loans was up and repayment rates were down.