Rising farmland values and strong farm loan portfolio performance were the highlights in the Federal Reserve Bank of Kansas City’s second quarter survey of Agricultural Credit Conditions. The survey details several indicators of farm financial condition in the 10th District, including farmland values, interest rates on farm loans, and credit supply and demand.
Rising Farmland Values
During the second quarter, District farmland values rose further, although the pace of gain slowed. Compared to first quarter gains, the value of nonirrigated and irrigated cropland in the District climbed 2.3% and 3.9%, respectively, to remain 20% above year-ago levels. District ranchland values grew 1% from the first to second quarter and year-over-year values are up 11% compared to 2010 levels.
Disparate weather patterns across the District caused farmland value gains to vary across the region. Plentiful rain and good growing conditions in Nebraska fueled the largest jump in second quarter cropland values, with a 30% increase over 2010. In contrast, drought conditions in the Southern Plains hurt wheat crop yields, prompted cattle herd liquidations and restrained farmland value gains to just 10% year-over-year. However, land lease revenues from energy exploration have helped support farmland values in some of the drought-stricken areas, particularly in Oklahoma and the Mountain States.
Respondents believe prices will remain elevated near current levels because of strong demand for farmland and tight supplies. Within the District, farmers and non-farmer investors continued to compete for quality acreage, with data indicating that sales of marginal ground have also picked up. The number of farms on the market remained low but is expected to increase after the fall harvest.
Farm Loan Portfolios
Farm credit conditions edged down during the second quarter after peaking in the first quarter. Farm loan repayment also eased but was expected to improve despite weaker farm income expectations. Credit conditions varied across the District, with fewer requests for loan renewals and extensions in Nebraska offsetting an increase in loan restructuring reported by Oklahoma bankers.
The majority of bankers are still reporting healthy farm loan portfolios. Of those respondents, on average, 90% of their loans had no significant repayment problems, 7% had minor repayment issues that could be managed easily, 2% will require major restructuring and fewer than 1% will likely result in a loss or forced sale of assets.
More than half of the 246 responding banks reported zero nonperforming loans more than 90 days past due. Of those reporting delinquencies, the breakdown by operation was split evenly between livestock operators, crop producers and loans for specialty crops, real estate and other purposes.
Due to strongly performing farm loan portfolios, bankers are reporting another round of easing in collateral requirements for borrowers. For the fourth consecutive month, fewer bankers are referring borrowers to non-bank credit agencies. Finally, interest rates continue their downward trend after reaching a 10-year high of 9.2% during the third quarter of 2006. During the second quarter, interest rates averaged 6.5% for operating loans and 6.2% on real estate loans.
Falling Farm Incomes
The 10th District’s farm income index fell in the second quarter as extreme weather conditions and rising input costs strained profit margins. In the Southern Plains, income expectations deteriorated as droughtlike conditions cut wheat production. Livestock producers were not immune to contracting margins; poor grazing conditions prompted herd liquidations and increased cattle feeding costs.
These conditions prompted Oklahoma bankers to report the steepest drop in farm incomes since the third quarter of 2008. Several respondents noted increased reliance on crop insurance to support farm income levels.
Farm incomes across the Central Plains declined to a lesser degree. Profits were trimmed as crop producers paid more for production inputs, such as seed and fertilizer, while livestock producers paid higher feed costs. However, both groups of producers saw relief from above-average levels of precipitation, reducing irrigation costs. However, areas along the Missouri and Platte Rivers experienced losses from heavy snowmelt and rain that led to severe flooding.
Bankers reported that operating loan demand remained sluggish during the second quarter but are forecasting higher demand for the second half due to the higher operating costs discussed above. Bankers are also estimating further deterioration in farm-based capital spending after many producers upgraded equipment at the end of last year.
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