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Reserve Banks Paint Mixed Picture of Farm Income, Farmland Values


Dec 6 - Third-quarter reports on farm income and farmland values from three Midwest-based Federal Reserve banks paint a mixed picture. Falling crop prices dragged farm income lower, the Kansas City Fed’s Survey of Agricultural Credit Conditions indicated, but farmland value gains did not moderate much. The St. Louis Fed’s Ag Survey, on the other hand, showed farmland values down and incomes up. Farmland values in the Chicago Fed’s district gained 14 percent in the third quarter, according to a survey for the bank’s Ag Letter, with most crop farmers expecting net cash earnings to be lower in the fall and winter, but some cattle and hog operators seeing higher net earnings relative to a year

“After last year’s drought, a rebound in U.S. crop production was under way in September, leading to a sharp drop in prices,” wrote Nathan Kauffman, Omaha branch executive and Maria Akers, associate economist of the Kansas City Fed. “Although persistent drought in the Western Plains stressed some district crops, preliminary estimates suggested that production would be relatively strong in many growing regions.”

However, the rebound in production may not have been enough to overcome the decline in prices, according to the authors, and more district bankers reported farm income fell short of year-ago levels. “In fact, survey respondents noted some producers were holding grain inventories, hoping for higher prices in the future,” they wrote.

The survey indicated farm income was expected to remain soft for the remainder of the year, despite some support from crop insurance and a gradual improvement in livestock sector profitability resulting from lower feed costs.

Despite lower farm income, bankers reported to the Kansas City Fed that demand for high-quality farmland outpaced supply as fewer farms were for sale during the growing season. "Both nonirrigated and irrigated cropland values were approximately 20 percent higher than a year ago, while ranchland
values gained 15 percent,” wrote Kauffman and Akers. Farmland value gains continued to exceed annual increases in cash rental rates, they noted.

An increasing number of bankers responding to the survey expected farmland values to plateau by the end of 2013. “Some agricultural lenders have responded to the steep rise in farmland values by lowering loan-to-value ratios for farm real estate loans,” Kauffman and Akers said.

Values for quality farmland across the Eighth District saw a decrease of 6 percent from the second-quarter average, the St. Louis Fed’s Ag Survey showed. Values averaged $5,332 per acre in the third quarter of 2013, down from $5,672 per acre in the previous quarter. Despite this decline, quality-farmland values remain 9.1 percent higher than at the same point last year.

Looking forward, “Bankers expect further erosion in district quality-farmland values over the next three months with an index value of 88,” stated the report. The report uses variables based on diffusion index methodology, where index values of 101-200 indicate higher-realized (or expected) income — based on survey responses — than a year ago, while index values of 0-99 indicate lower-realized (or expected) income than a year ago. A value of 100 indicates the same as a year ago.

According to the survey, the value of pastureland averaged $2,377 per acre in the third quarter, a gain of 1.4 percent over the past four quarters.

Farm income across the Eighth District increased modestly from the same quarter one year ago. This increase is in line with previous reports, which have generally indicated healthy farm economic and fi nancial conditions in the district. “Going forward, survey respondents expect farm income levels in the fourth quarter of 2013 to remain modestly above their levels from a year earlier,” said the report.

In addition, the survey indicated that capital and household spending increased modestly in the third quarter relative to the same period one year ago. “For the fourth quarter of 2013, bankers expect that household-spending levels will remain above their year-earlier levels (index value of 105). By contrast, bankers expect that capital expenditures by farmers will fall modestly short of levels seen in the fourth quarter of 2012 (index value of 95),” stated the report.

Cash rents for quality farmland across the district averaged $181 per acre in the third quarter, which was down slightly from the second quarter ($183 per acre). However, cash rents for ranchland or pastureland rose modestly in the third quarter ($62 per acre) compared with their second-quarter average ($57 per acre). According to the survey, “Average cash rents have moved steadily upward since the second quarter of 2012 — though at an uneven pace. Bankers expect that cash rents for both quality farmland and ranch- or pastureland are expected to increase modestly over the next three months.”

In the Chicago-based Seventh District, farmland values increased 14 percent in the third quarter on a year-over-year basis, according to the bank’s AgLetter in a report authored by David B. Oppedahl, senior business economist. “However, the return of the drought seemed to temper the year-over-year gain in Iowa farmland values,” he wrote, citing response to the bank’s Oct. 1 survey of agricultural lenders.

There was a 1 percent increase in “good” agricultural land values in the third quarter relative to the second quarter, the survey showed. However, respondents didn’t expect the upward trend to continue but leaned toward a decrease in the fourth quarter.

The Chicago Fed also reported that crop farmers faced the prospect of lower levels of net cash earnings this fall and winter relative to last year, with only 12 percent of survey respondents anticipating net cash earnings from crops to rise and 73 percent expecting them to drop. Thirty-seven percent of respondents expected higher net earnings for cattle and hog operations over the next three to six months relative to a year ago, while 26 percent predicted lower net earnings.