Farm income growth in the middle part of the country appears to be slowing as the broader U.S. economy seems to be in a tepid recovery.
Assessing financial conditions during the first quarter of 2013, the Federal Reserve banks of Chicago, Kansas City and St. Louis, highlighted reasons for cautious optimism as demand for agricultural products remains strong but production costs remain stiff as well.
Economists at the Federal Reserve Bank of Kansas City said rising production costs and falling crop prices limited farm income growth early this year. While farm income remained high, the surveyed bankers reported expectations for farm income to weaken during the second quarter as commodity prices taper off, despite seed and fertilizer costs that advanced steadily this season.
Bankers reiterated that high feed and forage costs continued to limit profits for livestock producers in the 10th Federal Reserve district, a region encompassing Colorado, Kansas, Nebraska, Oklahoma and Wyoming plus portions of New Mexico and Missouri. While lower crop prices might eventually provide some relief for feeders, lenders remained hesitant to see a return to halcyon days for the animal protein sector.
Similarly, lenders across the eighth Federal Reserve district reported higher-than-expected first-quarter income but higher-than-expected spending as well. As with bankers in the 10th district, survey respondents in Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee maintained an expectation that incomes will stagnate or begin to retreat in the near future.
Among the most consistent results from the surveys conducted across the three Federal Reserve districts were strong land values. Farm real estate values appreciated again last quarter, although lenders reported that prices were increasing less rapidly than in prior quarters.
In the seventh Federal Reserve district, made up of Iowa, Illinois, Indiana, Michigan and Wisconsin, farmland values appreciated 4% for the quarter, smaller than the increase for the prior quarter. Year over year, values grew 15% from the first quarter of 2012.
Demand to purchase agricultural land also increased relative to a year ago. For the three- and six-month periods ending in March 2013 there were increases in:
* the number of farms sold
* the amount of acreage sold
* the amount of farmland for sale
All increasing. Cash rental rates in the district were up 11% from 2012.
Bankers in the eighth district reported that farmland prices were down slightly relative to the previous quarter's expectations. Overall, lenders said prices dropped 2.3% in the district to an average of $5,111 per acre. Ranch and pastureland prices fell a sharper 5.1%.
Cash rents in the eighth district slipped 8.6% to an average of $171 per acre. Lenders expected land values and cash rents to appreciate slightly in the second quarter but they maintained an overall tone of caution about economic conditions.
Kansas City's survey found that land values rose 20% year over year in the first quarter, a modest slowdown compared to the previous rate of increasing values. Some bankers remarked that record land prices had raised debt obligations for young and beginning farmers and for producers trying to expand their operations.
Farmland values in the 10th district increased by double digits for the third straight year, setting a record for the bank's quarterly survey. The pace of appreciation, though, has clearly slowed, growing only 3.4% for non-irrigated land during the quarter, compared with first-quarter growth of 7.7% last year.
"Surging farmland values have reshaped farm balance sheets," Kansas City Fed economists Nathan Kauffman and Maria Akers wrote. "Rising farmland values have significantly reduced debt-to-asset ratios for many farmland owners. For producers looking to buy farmland with limited cash or equity, though, higher prices have translated into higher debt levels."
Credit conditions across the three regions remained strong.
In the 10th district, the index of funds available for farm loans edged slightly higher, and requests for farm operating loan renewals and extensions remained low.
Loan demand in the eighth district was essentially flat, with some regions of the district actually showing a decline in demand from last year. The report notes that the availability of funds to lend was strong and that loan repayments were larger than a year ago.
Economist David Oppedahl in the Chicago Fed likewise noted solid credit conditions for farmers. Both the index of availability of funds to lend and the index of repayment rates for non-real estate loans moved up during the first quarter. Fewer renewals and extensions also indicated an improvement in credit conditions.
Andy Vance is an editor for Feedstuffs weekly agricultural newspaper and blogger for Beef Producer.