St. Louis Fed Ag Survey Shows Farm Income and Farmland Prices Increased In the Fourth Quarter of 2013

ST. LOUIS – Farm income increased in the fourth quarter of 2013 (relative to a year earlier), according to the latest Agricultural Finance Monitor, published by the Federal Reserve Bank of St. Louis.  Likewise, quality farmland prices in the fourth quarter were also up from a year earlier.

The survey for the report was conducted Dec. 11 through Dec. 31, 2013. The results presented  are based on the responses from 49 agricultural banks within the boundaries of the Eighth Federal Reserve District. The Eighth District includes the state of Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee.

Farm Income and Expenditures

Farm income increased in the fourth quarter of 2013 compared with the same period a year earlier.  However, “farm income levels in the first quarter of 2014 are expected to be lower than a year earlier” stated the report. By contrast, a majority of respondents reported that capital equipment spending in the fourth quarter was below year earlier levels.

Current and Expected Land Values

The survey found that quality farmland values across the District averaged $5,868 per acre in the fourth quarter of 2013, which was modestly higher than the third-quarter average of close to $5,300 per acre.  When measured against figures from a year earlier, quality farmland values in the Eighth District increased by 12.2 percent. The value of Eighth District ranch or pastureland averaged $2,500 per acre in the fourth quarter of 2013, an increase of 5.2 percent from the previous quarter and 4.3 percent from a year earlier.

Cash rents for quality farmland across the District averaged $190 per acre in the fourth quarter, up 5 percent from the third quarter. Cash rents for ranch or pastureland ($65 per acre) also rose modestly in the fourth quarter compared with their third-quarter average ($62 per acre).

For the second-consecutive survey, “proportionately more bankers expect quality farmland values to decline over the next three months relative to a year earlier [index value of 89],” stated the report.  However, respondents see no change in average cash rents for ranch or pastureland over the next three months relative to a year earlier.

Outcomes Relative to Previous-Quarter Expectations

Farm income and household spending in the fourth quarter were roughly in line with bankers’ expectations; however, proportionately more respondents indicated that expenditures on capital equipment were less than expected in the fourth quarter. In terms of financial variables, the supply of funds to extend loans was modestly higher than respondents expected, while the opposite was the case for the demand for farm loans.

Financial Conditions

According to the survey, “demand for farm loans in the fourth quarter of 2013 was modestly below its levels from a year ago.” However, respondents expect that the demand for farm loans will pick up in the first quarter of 2014 compared with a year earlier.

Likewise, “there appears to be ample funds available for agricultural loans. Survey respondents reported that more funds were available to prospective borrowers in the fourth quarter than at the same time last year; adequate funds are also expected in the first quarter of 2014.”

During the fourth quarter of 2013, interest rates on fixed-rate loans declined modestly from their third-quarter averages across the three major loan types. By contrast, interest rates on variable-rate loans were up slightly from three months earlier for the three loan types.

Special Questions

Agricultural bankers were asked two special questions in this quarter’s survey. The first question pertains to how farmland values would be affected by a reduction in the federally mandated level of biofuels (ethanol and soy diesel) that are produced as petroleum substitutes and/or fuel additives. All else equal, a reduction in biofuel production would be expected to reduce the demand for corn and soybeans, thereby lowering their price and, potentially, the value of quality farmland used to grow these crops. Forty percent of respondents believe that “a reduction in biofuel production would have no effect on quality farmland values, while 60 percent thought otherwise,” stated the report. Of those who contend that a reduction in biofuel production would result in lower prices for quality farmland, “about a quarter believe that a decline of between 5 and 10 percent is most likely, with another 14 percent expecting quality farmland prices to fall between 10 and 20 percent”.

The second special question asked agricultural bankers to assess the greatest risk to the farm sector in 2014. A little less than two-thirds (63 percent) agreed that the greatest risk stems from lower-than expected commodity prices.  According to respondents, “the second-largest risk to the farm sector in 2014 would be higher-than-expected input costs, such as seed, fuel, or fertilizer.” This was mentioned by 15 percent of respondents. Unusual weather was ranked as the next-largest risk. Very few bankers, if any, believe that higher-than-expected interest rates or an unexpected decline in quality farmland values pose a significant risk to the farm sector this year.