Federal Reserve Banks: Ag credit conditions, land values updated

Lingering effects of the drought continue to impact ag credit; land values still posting gains


By Dave Natzke


With the 2012 harvest season wrapped up, third-quarter surveys of bankers in several district Federal Reserve Banks revealed dairy and livestock producers faced the biggest financial challenges. Across most districts, farmland and cropland values continued to rise.

Following are summaries of quarterly district Federal Reserve Bank reports:


District: Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin)


Overview: Drought remains on the minds of farmers and bankers alike. Due to higher feed costs, the drought was predicted to more adversely affect the net farm earnings of livestock farm operators than those of crop farmers. Even with milk prices up, prospects for dairy producers were diminished.


Land values: The year-over-year gain in district ag land values was 13% – the smallest increase since 2010. Iowa’s annual gain in farmland values continued to lead the district, up 18%; Michigan (7%) and Wisconsin (8%) saw the smallest gains. The quarterly increase in the district’s ag land values was 5%, up from just 1% for the previous quarter.


Credit conditions: Divergent net farm income paths for crop and livestock producers were reflected in district agricultural credit conditions. Quarterly demand for non-real-estate loans fell, but not as deeply as during the second quarter. However, there was a surge of non-real-estate loan demand relative to last year in Wisconsin, presumably to meet the needs of the dairy industry. Repayment rates on non-real-estate farm loans improved; the rates of loan renewals and extensions on non-real-estate loans edged down.


Interest rates: Interest rates on farm operating and real estate loans edged down again in the third quarter, setting new record lows. Illinois had the lowest average interest rates, while Wisconsin had the highest. Overall, borrowers needed more collateral to qualify for loans compared with a year ago.


Next quarter: Agricultural land values were expected to continue rising. Farmer demand to acquire land was not anticipated to ebb. Sustained strong demand among non-farm investors was also anticipated. Bankers expected farmland transfers to grow in volume. They also expected additional improvements in ag credit conditions outside of Wisconsin. Similarly, responding bankers predicted forced sales or liquidations of farm assets among financially stressed farmers to edge down, except in Michigan and Wisconsin. The volumes of operating and farm machinery loans were predicted to increase; Wisconsin bankers foresaw higher volumes of dairy loans in the final quarter compared with the same period a year ago. 


Source: AgLetter  – David Oppedahl, business economist





District: Kansas City (covering Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri)


Overview: The drought did not appear to have significant impact on farmland markets in the third quarter. However, livestock incomes fell more sharply than crop incomes as surging feed prices and rapidly deteriorating pastures raised production costs. 


Land values: Farmland value gains were more modest compared with the surge seen during the past two years, with Nebraska and Kansas posting strongest gains. For the quarter, district cropland values rose nearly 3%; farmland/ranchland values edged up about 2%, setting new records in many areas. On an annual basis, non-irrigated cropland prices rose nearly 25%; irrigated land values remained more than 20% higher than 2011 levels; and ranchland values appreciated an average of 14%. Land value gains continued to accelerate faster than cash rents (up 12% on annual basis).


Credit conditions: Surging feed and fuel costs resulted in the steepest quarterly increase in operating loan demand since the first quarter of 2010. Bankers offered more loan renewals and extensions as loan repayment rates eased. Bankers expected loan demand to soften somewhat in the fourth quarter as crop prices and feed costs moderated. 

Quarterly farm spending on capital purchases was curtailed for the first time since early 2010, and was expected to remain low in the fourth quarter. 


Interest rates: Lenders continued to lower average interest rates on both farm real estate and farm operating loans to attract borrowers in an extremely competitive lending environment. Interest rates posted new record lows. 


Next quarter: Farmland values would stabilize at high levels heading into 2013. Bankers expected sales to remain solid even with a seasonal upswing in the number of farms for sale after harvest. Bankers expressed some concerns about the effects of the drought extending into 2013. The spike in feed costs forced some herd liquidations. Bankers indicated that further liquidations may be warranted if grain inventories remain low and inadequate moisture levels persist. Survey respondents expected lower repayment rates over the next quarter as a result of the drought.


Source: Survey of Tenth District Agricultural Credit ConditionsJason Henderson, branch executive, and Maria Akers, assistant economist.




District: Dallas (covering all or portions of Texas, New Mexico and Louisiana)


Overview: Crop conditions were mixed, depending on how much rainfall was received, but overall, crops were in better shape than last year. Surveyed bankers emphasized a need for rain as several areas experiencing a second consecutive year of drought conditions. Respondents voiced particular concern for the livestock sector, as pasture conditions remain poor and ranchers face high feed costs due to elevated grain prices. 


Land values: Cropland values rose in the third quarter. Irrigated cropland saw the largest increases; values were up 4% from the second quarter and were up 13% from last year. Ranchland values were largely unchanged.


Credit conditions: Demand for agricultural loans continued to decline, but not as steeply as in prior quarters. Feeder cattle loans continued to see the largest drop in volumes compared with the same period a year ago, followed by dairy loans. Loan repayment rates rose, while loan renewals and extensions continued to fall.


Interest rates: Variable loan interest rates rose for feeder cattle, operating and intermediate term loans, and remained largely unchanged for farm real estate loans.


Next quarter: Non-farm demand for land has pushed prices above an affordable level for farmers or ranchers to purchase the land for agricultural use. A majority of surveyed bankers expect land values to hold steady over the next three months, although 18% anticipate an increase – the highest share since early 2011.


Source: Agricultural Survey – Federal Reserve Bank of Dallas




District: Richmond (covering all or portions of the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and West Virginia)


Overview: Bankers attributed a softer lending environment to higher commodity prices, excellent yields, an increase in tobacco contracts, and sound profits for many farmers. Lenders mentioned higher input costs had negatively impacted the poultry, dairy and livestock industries. 


Land values: The market value of good farmland averaged $3,370 per acre in the third quarter, down 0.4% for the quarter, but 2.5% more than a year earlier. Looking ahead, bankers anticipate that growth of farmland prices will pick up during the fourth quarter. 


Credit conditions: Credit demand was mixed to weaker; loan repayment rates increased, while requests for loan renewals dropped. The index for collateral requirements increased. 


Interest rates: Interest rates for agricultural loans were lower for all categories. 


Expectations: Lenders’ expectations for farm loan volumes in the fourth quarter of 2012 were mixed, with higher anticipated demand for operating loans.


Source: Fifth District Survey of Agricultural Credit Conditions – Judy Cox, senior economic analyst.





District: St. Louis (covering Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee)


Overview: District farm income and capital spending were down significantly, although there was some disparity across zones. Household spending across the district was also mixed.


Land values: Cropland values (non-irrigated) were up 5.2% from a year earlier in the St. Louis zone; up 1.6% in the Little Rock zone; down 3.4% in the Louisville zone; and up 5.9% in the Memphis zone. The average value of land (quality farmland, ranch or pastureland ) across the district was 4% higher. Bankers expect land values and cash rents to continue to rise in the fourth quarter of 2012. Gains in quality farmland are generally expected to outpace gains in ranch or pastureland (non-irrigated) in almost all zones.


Credit conditions: Overall, bankers reported improvement in the availability of loans, although there was some variability across zones. Bankers expect higher demand for loans and lower loan repayment rates in the fourth quarter.


Interest rates: Interest rates remain comparable to the previous quarter, though modestly lower.


Next quarter: Expectations for income and spending in the next quarter display a sharp contrast in responses across zones. Bankers in the Little Rock and Memphis zones expect income and household and capital spending to all be above year-ago levels in the fourth quarter. However, bankers in the St. Louis and Louisville zones are generally more pessimistic.


Source: Agricultural Finance Monitor – Gary Corner, senior examiner, Bank Supervision and Regulation Division; and Brett Fawley, senior research associate, and Kevin L. Kliesen, business economist and research officer, Research Division.




District: Minneapolis (covering all or portions of Montana, North and South Dakota, Minnesota and northwestern Wisconsin) 

Report not available.