WASHINGTON, Jan. 27- Strong farm income propelled farmland values to record highs and strengthened loan portfolios at agricultural banks at the end of 2011, according to the Federal Reserve Bank of Kansas City’s January 2012 Agricultural Finance Databook.

According to the report, rising farm incomes sent farmland values soaring across much of the Corn Belt and the northern Plains in the third quarter and farm credit conditions strengthened as farmers used elevated incomes to pay off loans.

The following information is taken from the Jan. 2012 report, which can be found here.

Crop prices remained historically high but volatile through the fall harvest, underpinning robust farm income expectations in areas with favorable yields. Cropland values across the Corn Belt and northern Plains soared to all-time highs with many states posting annual value gains between 20 and 40 percent. Brisk bidding at farmland auctions kept prices high and enticed landowners to place their land holdings up for sale, added the report.

Many states posted record annual increases in farmland values, led by Nebraska where nonirrigated cropland rose by almost 40 percent compared with last year. 

Farmland values rose to a much lesser extent in the southern Plains as severe drought hurt crop production and forced herd liquidations, stated the report. Even with substantial gains so far this year, many bankers in the Kansas City and Chicago Districts anticipated that farmland values would rise further in the coming months.

Agricultural bank profits improved as borrowers repaid farm debts. In the third quarter, the return on assets at agricultural banks rose further and remained stronger than their banking peers.

Agricultural bank returns in the third quarter improved from year-ago levels and exceeded the financial performance at other small banks. The rate of return on assets at agricultural banks reached 0.8 percent, in contrast to 0.3 percent at other small banks

Rising farm incomes boosted liquidity in the farm sector and slowed non-real estate lending in 2011. Agricultural bankers reported soft operating loan demand throughout the year. With more deposits and limited gains in non-real estate loan volumes, the average loan-to-deposit ratio at agricultural banks plunged to its lowest level in a decade during the third quarter with weaker activity in the fourth quarter.  According to farm loan survey data from the week of Nov. 7-11, 2011, commercial banks made substantially fewer short-term loans for livestock and operating expenses compared to last year.

Commercial banks struggled to maintain market share in an extremely competitive lending environment. Intense competition for loans led to more favorable loan terms, reduced interest rates and lengthening of some loan maturities by agricultural lenders.


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