Farmland values in the states encompassed by the Kansas City Federal Reserve surged to a record high in the third quarter, with stronger gains in the Northern Plains. District cropland values rose more than 25% over the past year, and ranchland values increased 14%. Furthermore, a quarter of survey respondents felt that cropland values had yet to peak.
Nebraska posted the strongest gains with irrigated and non-irrigated land values rising approximately 40% above year-ago levels. Record gains in the Northern Plains were fueled by another bumper crop this harvest season that raised farm income expectations despite the recent slide in crop prices.
In the Southern Plains, weaker farm income limited farmland value gains. Severe drought struck Oklahoma and areas of Kansas, Missouri and Colorado, stressing crops and drying out pastures. Reduced yields cut farm incomes and drove an increase in crop insurance claims. In addition, poor grazing prompted livestock operators to relocate herds or liquidate. While increased cattle sales provided a temporary boost to farm income, smaller herds could limit farm income in the future.
Despite variable farm income, District ag credit conditions held relatively steady in the third quarter. Loan repayment rates remained strong with fewer requests for loan renewals and extensions. Interest rates for farm operating and real estate loans reached new survey lows. Slightly more bankers reported an increase in collateral requirements but noted ample funds were available for loans to qualified borrowers. However, operating loan demand remained weak in all District states and bankers reported that fewer farmers were upgrading machinery and equipment.
With a limited number of farms for sale during the growing season, strong competition bid up sales prices at public auctions. For new farmland purchases, bankers continued to report that cash down payments averaged 20% of the purchase price, pledges of existing equity accounted for another 30%, and the remaining 50% was financed with new debt. Mirroring movements in land values, cash rental rates also rose compared to last year and were up 15% for non-irrigated and 21% for irrigated acreage in the District.
District farm incomes remained above year–ago levels, despite softening in the third quarter as drought continued to shape District income. In Nebraska, where farmers enjoyed ample precipitation, bumper crops fueled strong farm income gains even with a downturn in crop prices just before harvest. In contrast, bankers in drought-stricken Oklahoma expected farm incomes to dip below year-ago levels. Several contacts noted that crop insurance payments would underpin farm incomes in regions suffering from extreme drought.
Robust livestock demand also helped underpin District farm income expectations. Livestock prices remained higher than last year, supported by strong demand. Cattle and hog exports climbed during the third quarter, and domestic consumption remained strong throughout the grilling season. Recent declines in crop prices reduced feeding costs and improved profit margins. Survey contacts reported that herd liquidations in drought areas provided a temporary boost to farm income, and tight supplies may support stronger livestock prices going forward.
Bankers reported that operating loan demand remained sluggish in the third quarter and was not expected to improve in the near future. The rise in production costs slowed somewhat with the recent retreat in crop and energy prices, reducing input costs. District contacts noted fewer farmers made capital purchases in the third quarter, and herd liquidations could reduce demand for livestock loans this winter.
Credit conditions generally held steady across all District states in the third quarter. Bankers reported strong agricultural loan portfolios even with varied farm income levels. The loan repayment index was little changed from the second quarter and remained well above year-ago levels. Bankers in Nebraska expected that farm loan repayment rates would improve after harvest as farmers used profits to pay down debt, and crop insurance was expected to mitigate loan repayment issues in Oklahoma, Kansas and Missouri. Bankers also reported fewer requests for loan renewals and extensions in all states except Kansas.
With weak loan demand, bankers reported an increase in the amount of funds available for farm loans. In fact, there were no reports of loans that were refused due to a shortage of funds during the third quarter. Survey respondents also indicated farm loans were available at interest rates that reached a survey low. Interest rates on operating loans edged down further, averaging 6.4%, while the average interest rate on farm real estate loans dropped to 6.1%.
After easing during the past six months, slightly more bankers reported raising collateral requirements on short-term operating loans and intermediate-term machinery and equipment loans. Still, collateral requirements remained below year-ago levels and have eased substantially since peaking in 2009. Bankers also reported a slight uptick in referrals to non-bank credit agencies.
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