After an excessively wet spring that hindered planting of crops in parts of the Midwest and ongoing weakness in grain prices worldwide, agricultural bankers reported a continued drop in farm income during the second quarter of 2015 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, the average value of quality farmland remained steady during the second quarter after dropping sharply the first quarter.
The survey for the report was conducted from June 15 to June 30. The results were based on the responses of 39 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 Mid-South states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Farm income, expenditures drop
Bankers reported a continued drop in farm income compared with the same period a year earlier. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher income compared with the same quarter a year earlier; results lower than 100 indicate lower income), the farm income index value was 31 for the second quarter of 2015.
This was the fourth consecutive quarter that this value fell below 100, and represented the lowest level since the survey began in the summer of 2012. Looking ahead, a large percentage of bankers expect further declines in the third quarter.
“Excessive moisture has severely delayed and/or prevented planting of the soybean crop. Almost no hay has been baled and the wheat harvest will soon be affected,” a Missouri lender noted. “All of these factors will likely negatively affect farm income this year and next.”
Corresponding with the decline in farm income, household expenditures and capital spending by farmers and ranchers also dropped during the second quarter, with expectations this spending will continue to decline in the third quarter.
“Our trade area is primarily cash grain, and the lower grain prices will have a negative impact on farm income, prompting producers to reduce spending for both business and household,” an Illinois lender said.
Quality farmland values hold steady
During the second quarter of 2015, bankers reported that quality farmland values were virtually unchanged compared with a year ago, while the value of ranch or pastureland rose 3.2 percent. “This is a notable reversal of the substantial decline in quality farmland and ranch or pastureland values recorded in the previous survey,” according to the report. However, the report noted that the majority of lenders surveyed expect quality farmland to decline in the third quarter, while they were evenly split on whether ranch or pastureland values would rise or fall.
There was a notable decline in cash rents for quality farmland, the largest recorded since the survey began in the second quarter of 2012. Quality farmland rents fell 6.4 percent during the second quarter of 2015, compared with a year earlier. Cash rents for ranch or pastureland also declined 5.2 percent, compared with a year earlier.
“The decline in cash rents could stem from the recent softening in farmland values and commodity prices,” the report said.
Looking ahead, proportionately more bankers expect to see continued cash rent declines for quality farmland in the third quarter, while most expect ranch or pastureland rents to remain unchanged.
Given the decline in farm income, the survey asked lenders two additional questions to assess the ability of Eighth District farmers to meet the terms of their loan agreements and to gauge if farmers were having difficulties renewing their lines of credit.
The answers to the first question indicated that most district farmers have experienced no significant repayment problems. The answers to the second question indicated that the majority of the lenders’ customers were in good financial shape, allowing them to retain access to all operating lines of credit. However, in those instances when the lenders did not renew lines of credit, close to 16 percent of lenders cited a decline in borrower financial conditions significant enough to keep these borrowers from meeting existing credit standards.
“As indicated by responses to a set of special questions, the agricultural sector appears to be coping well with a period of weakening farm income growth,” according to the report. “However, the average agricultural bank has a small share of borrowers that need to resolve repayment problems and/or have lost access to their lines of credit due to deteriorating financial conditions.”