St. Louis Fed Ag Survey: Farm Income Remains Under Pressure; Land Values Stabilize

ST. LOUIS – Midwest and Mid-South farm income and expenditures remained under pressure during the third quarter of 2016, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, quality farmland values and ranchland or pastureland values stabilized.

The survey was conducted from Sept. 15-Sept. 30, 2016. The results were based on the responses of 34 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 Midsouth states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The survey also included two special questions focused on the potential for loan repayment issues and possible near-term outcomes.

Farm Income, Expenditures Decrease

The majority of lenders continued to report lower farm income levels compared with 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 diffusion index for farm income during the third quarter of 2016 stood at 41. While up slightly from the previous quarter’s level of 24, it still represented the 11th consecutive quarter of the farm value index remaining below 100. In addition, proportionately more lenders said they expect farm income in the fourth quarter to be lower than previous year’s levels.

In tangent with lower income levels, household spending and capital expenditures also fell in the third quarter, with the household spending index at 59 and the capital spending index at 34. Lenders said they also expect this trend to continue in the fourth quarter.

“The financially conservative farmer is probably going to survive during this period of low grain and cattle prices. The young farmers with very little equity are really going to struggle,” said a Missouri lender. “It looks like the corn yields are coming in exceptionally high, which will help everyone pay expenses. However, I think there will be very little left to purchase land, machinery, and other equipment.”

Quality Farmland Values Stabilize While Cash Rents Continue To Tumble

Quality farmland values were unchanged during the third quarter of 2016, compared with a year ago. In addition, ranchland or pastureland values rose 1.1 percent. However, looking ahead at the fourth quarter, proportionately more lenders indicated they expect values to decline for quality farmland and ranch or pastureland.

In contrast, year-over year cash rents for quality farmland dropped 6.1 percent during the third quarter. This followed a drop of 10 percent seen during the second quarter. Meanwhile, cash rents for ranchland or pastureland fell 3.9 percent in the third quarter, following a plunge of 20.7 percent in the second quarter. Rents for quality farmland and ranchland or pastureland are expected to continue to decline in the fourth quarter, the lenders said.

Special Questions Regarding Prospects for Loan Repayment Problems

In light of the recent declines in farm incomes, the third quarter survey also asked lenders two special questions regarding expectations of loan repayment problems and potential outcome scenarios for borrowers.

The first question asked lenders to identify the loan categories that they believe would have the greatest repayment problems. Close to 60 percent of the lenders responded that operating lines of credit would be the most problematic category; 13 percent said they believed it would be machinery and equipment loans and 9 percent indicated it would be real estate loans. Meanwhile, close to 20 percent said they did not expect any problems.

The second question asked the lenders to assess the near-term outcomes for borrowers experiencing repayment problems. More than 50 percent said borrowers would need to put up additional collateral to cover unpaid portions of operating lines of credit. Meanwhile, 22 percent said that borrowers would need to “tighten their belts,” but that the lenders did not expect them to default. Another 19 percent of the lenders said they would expect to see longer-term workouts with their borrowers. Only 3 percent said they would expect their borrowers to have to reduce the size of their operations or exit the farming business, while only another 3 percent thought their borrowers would refinance with another lender.