St. Louis Fed ag survey: Third quarter farm income drops, farmland values rise
ST. LOUIS ― Amidst another bumper fall harvest and a drop in grain prices, Eighth District agricultural bankers reported a sharp decline in farm income expectations for the third quarter of 2014 compared with the previous year, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. In contrast, lenders reported a rise in farmland and ranchland values.
The survey for the report was conducted from September 15 through September 30, 2014. The results were based on the responses of 41 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Midsouth States: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
The third quarter survey included three additional questions to assess the financial health of agricultural borrowers in the Eighth District.
Farm Income and Expenditure Expectations Plummet
As grain prices continued to drop during the third quarter, expectations of Eighth District farm income declined to their lowest levels since the St. Louis Fed survey began in September 2012. Capital and household expenditures also fell, and lenders expect these trends to continue into the fourth quarter.
“The dramatic drop in grain prices will put many producers in a cash flow crunch,” said an Illinois banker. “Highly leveraged operators will be facing negative cash flow from grain.”
Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher lender values compared with the same quarter a year earlier; results lower than 100 indicate lower lender values), the third quarter index value for farm income was 76, compared with an expected value of 80. Looking toward the fourth quarter of 2014, lenders expect farm income to drop below year-ago values, as indicated by an index value of 41.
“With the price of corn falling to about $2.60 and soybeans falling below $9, I do not know how young farmers with no equity built up will pay their cash rent or the payment on equipment and land purchased,” reported a Missouri banker. “This is a critical time for the farming community.”
A lender in Arkansas noted, “Prices for all commodities grown in our region have declined to near-production-cost levels. Capital spending has sharply declined to near zero. Many customers will face crop loan carryovers this year.”
Farmland, Ranchland Values Rise
On average, prices for Eighth District quality farmland, as well as ranchland or pastureland, rose to their highest levels since the St. Louis Fed survey launched in September 2012, exceeding the expectations of lenders who thought values would decline during the third quarter.
Quality farmland prices averaged $6,120 per acre in the third quarter of 2014, up 11.8 percent from the second quarter’s average of $5,473 and up 14.8 percent from this time last year.
The report cautioned that quarter-to-quarter changes in farmland values can be volatile due to changes in local economic conditions and response rates that vary from one survey to the next.
Ranchland or pastureland prices also rose during the third quarter of 2014, with lenders reporting average prices of $2,570 per acre, up 11.1 percent from $2,313 per acre in the second quarter and up 8.1 percent from this time last year.
Cash rent values were also higher in the third quarter, with quality farmland rents up 1.6 percent from the second quarter to $194 per acre, and ranch or pastureland rents up 6.8 percent to $63 per acre. Despite the third quarter jump, lenders reported that they expect prices and cash rents for quality farmland to decline in the fourth quarter relative to the same period last year. Meanwhile, a substantially smaller proportion of lenders said they expected values of ranch or pastureland to decline next quarter.
Agricultural loan demand in the third quarter was consistent with the expectations of bankers from three months earlier, while the average interest rate on most fixed- and variable-rate loan products declined or was unchanged from three months earlier.
Looking at the availability of funds to lend, a proportionately larger number of bankers had more loanable funds available in the third quarter than the year before, but lenders expect availability to fall in the fourth quarter. They also reported a proportionately slower loan repayment rate than a year ago, and expect that repayment rates will continue to slow in the fourth quarter relative to a year ago.
Questions for Assessing Agricultural Borrowers’ Financial Health
To help assess the current financial condition of Eighth District agricultural borrowers, the survey asked lenders three additional questions. Lenders were first asked to assess the change in loan-to-value ratios (LTVs) over the past three years for agricultural production/operating loans and for land purchase loans.
Close to two-thirds of respondents indicated there was no change in LTVs over the past three years. Of those bankers reporting a change, slightly more lenders reported an increase in comparison to those who reported a decrease.
Lenders were then asked to assess the range of debt-to-equity ratios (DERs) for agricultural borrowers in their loan portfolios. Median responses ranged from a low of 20 percent to a high of 75 percent.
For the third question, lenders were asked to assess how their agricultural borrowers’ DERs have changed over the past three years. While close to 44 percent reported that DERs have remained stable, 38.2 percent reported a decrease. Only 17.6 percent of the lenders reported an increase.
Overall, these results suggest that the average financial condition of Eighth District agricultural borrowers has not deteriorated over the past three years.