KANSAS CITY, August 15, 2012 - Drought conditions wilted farm income expectations during the second quarter, according to the Federal Reserve Bank of Kansas City’s quarterly Survey of Agricultural Credit Conditions.  The Tenth Federal Reserve District includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.

At the beginning of the quarter, participation in the southern portions of the District led to a rebound in winter wheat production and farm incomes. Yet, by the end of the quarter, intensifying drought conditions were cutting bankers’ expectations for farm income during the third quarter, according to the 241 bankers who responded to the survey.

Bankers reported that livestock producers were bearing the biggest burden from the drought. Higher feed costs and lower cattle prices from forced herd liquidations were cutting livestock profits. Several survey respondents noted that high crop prices would support crop incomes for producers able to harvest a crop and those that have crop insurance.

Despite the weaker outlook for farm income, loan repayment rates were expected to hold near year-ago levels. Although operating loan demand was sluggish in the second quarter, bankers expected loan demand to strengthen in the third quarter as drought boosted production costs for fuel and feed.

In contrast, intermediate-term loan demand for farm machinery and equipment was expected to fall with weaker farm income and capital spending. In addition, capital spending during the past year limited the demand for further equipment upgrades by some agricultural enterprises.

Bankers indicated ample funds were available for farm loans, and interest rates edged down further. The average interest rate on farm operating loans fell to 6.1 percent and the average interest rate on farm real estate loans was 5.7 percent in the second quarter

District farmland values rose less rapidly during the second quarter and were well above year-ago levels. District irrigated and nonirrigated cropland prices remained more than 25 percent above year-ago levels. Nebraska continued to lead District annual farmland value gains with cropland prices more than 35 percent above year-ago levels and ranchland values almost 27 percent higher. Looking forward, more than three-quarters of the 241 survey respondents expected farmland values to hold at current levels during the rest of the growing season.

The complete survey is available at www.KansasCityFed.org/agcrsurv/agcrmain.htm.



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