As noted in this issue's cover article, "The Drought's Impact on Eighth District Agricultural Conditions," the summer drought has decimated Eighth District corn and soybean crops and forced many livestock and dairy operations to cull their herds because of parched pastures and high feed costs. What impact will this have on farm income, farmland prices and farm credit conditions?
While the final harvest tallies won't be available for several more months, the St. Louis Fed's new quarterly survey of the expectations of agricultural banks, the Agricultural Finance Monitor, indicates that bankers expect a significant impact on farm income across most of the District in the third quarter of 2012 compared with a year earlier.
With the launch of its survey, the St. Louis Fed now joins the Kansas City, Chicago, Dallas, Minneapolis and Richmond Feds in producing a regional agricultural financial conditions report. In addition to farm income, the Monitor reports bankers' expectations of farmland values, farm loan repayment rates, required collateral, farm loan interest rates, and credit supply and demand. (The St. Louis Fed survey was developed and conducted with the help of the Kansas City Fed.)
On average, lenders across the Eighth District expected third-quarter 2012 farm income and capital expenditures to be significantly lower than the third quarter of 2011. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher lender expectations compared with the same quarter a year earlier; results lower than 100 indicate lower lender expectations), the average expectations index for third quarter 2012 was 81, compared with an index of 140 for the second quarter 2012. Meanwhile, farmland values were expected to remain the same, or rise slightly, over the next three months, while demand for agricultural loans was expected to remain healthy, even higher in some areas. In addition, third-quarter 2012 loan repayment rates were expected to be on par with second-quarter 2011 rates.
How close are expectations to eventual reality? A 2009 study by the Kansas City Fed ("Can the Ag Credit Survey Predict National Credit Conditions?") shows a strong correlation between reported lender expectations in its surveys and future loan repayment rates and collateral requirements.
The inaugural St. Louis Fed survey was conducted June 15 to June 29, 2012, and was based on the responses of 88 agricultural banks located within the boundaries of the District. The next survey, which is now under way and will be released in mid-November, includes two additional questions about the percentage of loans covered by crop insurance and the expected impact of drought on farm incomes.