St. Louis Fed Ag Survey: Farm Income, Land Values Continue to Slide

ST. LOUIS ― Amid an ongoing worldwide slump in grain prices, Eighth District agricultural bankers reported a continued decline in farm income during the first quarter of 2015 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, the average value of quality farmland also declined, with this trend expected to continue during the second quarter.

The survey for the report was conducted from March 16 – March 31, 2015. The results were based on the responses of 45 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.

Agricultural bankers were asked two additional questions as part of this survey to assess whether expectations for further softening of farmland values and farm incomes might cause some renters to walk away from existing lease commitments, and what potential impact this could have on their respective banks. The answers indicated that the percentage of farmers seen walking away from committed leases this year is expected to be relatively small, with Eighth District bankers seeing little to no impact on their respective banks or their customers.

Farm Income, Expenditures Decline

Bankers noted a continued decline in farm income compared with the same period 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 farm income index value was 49 for the first quarter.

This was the third consecutive quarter that this value fell below 100, and represented the lowest level since the survey began in the summer of 2012. Looking ahead, a large percentage of bankers expect further declines in the second quarter.

Corresponding with the decline in farm income, household expenditures and capital spending also fell during the first quarter.

“Lower grain prices are finally changing the psychological mindset for producers,” a Missouri banker noted. “Most producers are not able to lower operating expenses significantly and are looking at troublesome cash-flow projections. Grain prices will likely remain in this price range for several years and will have a huge impact on lenders.”

Farmland Values Continue to Erode

During the first quarter of 2015, bankers reported an average 2.5 percent decline in quality farmland values compared with a year ago. This was the largest quarterly percentage decline since the survey began in the summer of 2012. The value of ranch or pastureland declined 1.6 percent. Looking ahead, bankers expect quality farmland prices to decline further in the second quarter of 2015. In contrast, ranch or pastureland values are expected to rise.

While cash rents for quality farmland declined 3.3 percent in the first quarter, cash rents for ranch or pastureland rose 2.7 percent. Looking ahead, proportionately more bankers expect to see continued cash rent declines for quality farmland in the second quarter, while they expect ranch or pastureland rents to increase.

Loan Demand Increases

The stress of lower farm incomes is beginning to adversely affect farm working capital, therefore boosting loan demand while curtailing the rate at which farmers repay their loans. Indeed, loan demand in the first quarter was significantly stronger than the expectations of bankers from three months earlier, and the first quarter index value of 141 was the highest level in the survey’s history. Interest rates on most loan types were little changed in the first quarter compared with the previous quarter.

Answers to Leasing Questions

The survey asked bankers to estimate the percentage of farmers in their areas who might walk away from committed farmland leases in 2015. Close to 67 percent of the bankers expected that only less than 1 percent of farmers might walk away from committed farmland leases, while 28 percent estimated that only 1 to 5 percent of renters might do so.

The bankers were then asked how important of an economic issue such a development could be for their customers. Close to 77 percent reported that it would not be a significant issue at this time, while close to 13 percent indicated that it might have a small impact. “Overall, with the planting season completed or underway in most areas of the District, our results suggest that bankers do not believe this issue is a pressing problem for them or their customers,” the report concluded.