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Fed Survey: Farmers Using Profits to Invest in Farmland

May 13, 2011
By: Ed Clark, Top Producer Business and Issues Editor

The good times of 2010 have rolled nicely into 2011 for most crop producers. Not only were profits strong in the first quarter 2011, but instead of taking on a high levels of new debt, much of new land and higher input costs are being self-financed out of profits, according to a survey released today of ag credit conditions by the Federal Reserve Bank of Kansas City.

The report entitled, “The Farm Boom Continues,” points out that cropland values continued to jump an average of 20% in the first quarter compared to year-ago levels in the Kansas City Fed’s region of Colorado, Nebraska, Kansas, Oklahoma, Wyoming, the northern half of New Mexico, and the western third of Missouri.
 
What’s the takeaway message? “The next 18 months look good,” says Mike Walsten, editor of LandOwner, a publication of Farm Journal Media, a sister publication of AgWeb. Farmers are in a good position to weather any future financial storm, he says. “With so much land paid for out of profits, it is much less likely that this will be a repeat of the 1980’s farm depression, or the housing crisis, even if land values fall,” Walsten says.
 
“The rest of 2011 looks pretty positive,” says Brian Briggeman, economist with the Kansas City Fed, and chief author of the report. Particularly for crop producers, shrinking crop inventories have lifted prices, boosting crop profits. The survey did not ask for bankers to speculate on farm income for 2011, but Briggeman notes that USDA estimates farm income to increase nearly 20%.
 
That said, however, there are sharp differences among the states. While farmland values surged roughly 24% during the past year in Nebraska and Kansas on non-irrigated acres, they rose a more modest 14.5% in Oklahoma, and 10.6% in mountain states. Rental rates also showed a wide variance. Rates rose an average of 17%—18% in Nebraska—while rates comparing the first quarter 2011 to 2010 rose a modest 1.6% in Oklahoma. The key areas of concern, Briggeman says, are the severe wheat drought areas of western Kansas, in addition to Oklahoma.
 
Ranchland values also rose sharply, jumping 11% above year-ago levels during the first quarter compared to a year earlier. Stronger profits for livestock operators and increased demand for cattle grazing boosted ranchland values. In addition, booming energy exploration lifted land lease revenues and farmland values, especially in the mountain states and Oklahoma.
 
The report says that most bankers look for farmland values to stabilize during the next three months. With stronger farm income, more borrowers boosted cash down payments and pledged existing equity for farmland purchases.
 
Loan repayment rates remained strong in the district states, and loan renewals and extensions held at low levels. The exception is Oklahoma. In addition, some bankers are concerned that elevated crop and livestock prices might fall and narrow profit margins.
 
The report says that in the first quarter of 2011, the farm income index rose to its highest level in a decade. Crop prices rose steadily with shrinking crop inventories, adverse weather conditions and competition for acreage as spring planting approached. Cattle and hog prices also moved higher with strong global demand for protein. “Elevated farm income continued to support robust capital spending,” the report’s economists say.
 
Interest rates on operating loans edged down further, averaging 6.6%, while interest rates on farm real estate loan held at an average of 6.3%.
 
Despite the overall positive report, some bankers voice concerns. “Current agricultural land prices are a concern to me as I am afraid they may be a bubble in the making,” says a North Central Missouri banker. A Colorado banker says, however, that “2011 appears to have the potential to repeat excellent gains, even with increases in cash rents and other crop inputs.”

 

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