St. Louis Fed Ag Survey: Farm Income, Land Values Decline in Fourth Quarter 2016

ST. LOUIS – Midwest and Midsouth farm income and expenditures fell during the fourth 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 also declined.

The survey was conducted from Dec. 15-Dec. 31, 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 three special questions that focused on farmland sales.

Farm Income, Expenditures Slump

Agricultural 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 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 fourth quarter of 2016 fell to 39. This represents the 12^th consecutive quarter of the income index being below 100.  Looking ahead to the first quarter of 2017, lenders’ farm income expectations remained low, with a diffusion index value of 41.  

“Cattle prices have negatively affected overall income for 2016. One large land-owning estate has liquated some real estate in 2016, but I expect this to slow down in 2017,” an Arkansas lender reported.

In conjunction with lower income levels and in line with the recent downward trend, fourth quarter household spending and capital expenditures were lower than a year earlier. The household spending index came in at 77, while the capital spending index value was 45. Lenders said they also expect this trend to continue in the first quarter of 2017.

Quality Farmland Values Fall, Along with Cash Rents

After stabilizing in the third quarter, quality farmland values during the fourth quarter of 2016 were 8 percent lower than they were during the fourth quarter of 2015. Ranchland or pastureland values were 3.5 percent lower than a year ago.

“We are experiencing the same effects of the lower corn prices that other financial institutions are experiencing,” according to an Illinois lender. “Farmland values have decreased slightly; however, they are still very high compared to what any farm can cash flow from straight commodity crop production.”

Meanwhile, lenders reported an 11.6 percent year-over-year decline in ranchland or pastureland cash rents, and a 1.8 percent decline in quality farmland cash rents.

“Most bankers expect further declines in the first quarter of 2017, as the diffusion indexes of land values and cash rents are below 100 for each type of agricultural land,” the report said.

Special Questions Regarding Farmland Sales

Due to reports of possible increases in farmland sales, the survey asked bankers three special questions to help characterize the farmland market in their respective areas.

The first question asked lenders to choose, from four ranges of interest rates on fixed-rate farm real estate loans, the rate range that would trigger a slowdown in farmland sales. Close to 25 percent of lenders said they thought rates would need to reach 5.5 percent to 6 percent; 22 percent said 6 percent to 6.5 percent and 25 percent said 6.5 percent to 7 percent. However, 28 percent said rates would need to rise above 7 percent before impacting farmland sales.

An Illinois lender remarked, “Regarding the special question on interest rates, I think overall farm profitability will be a bigger driving force than interest rates. The farm economy is preparing to shed the next layer of farmers--those who are near retirement age or at a point where their operations cannot sustain the current debt load and family living costs. This is about 20 percent of my portfolio in the next 5 years.”

The second question asked lenders their views on how farmland sales will fare in 2017. Only 13 percent reported they believed farmland sales volume will increase in 2017. Meanwhile, 63 percent of respondents expected no change, and 25 percent reported they believed farmland sales will decrease.

The third question asked bankers whether farmers remained the largest buyers of farmland in their respective areas in 2016. In response, 69 percent of the bankers reported that farmers bought more than 50 percent of the farmland,  while 31 percent reported that farmers purchased less than 50 percent. “Hence, farmers remain the largest buyer group of District farmland,” the report said.