WASHINGTON, Nov. 12, 2015 – The Kansas City Fed is painting a dreary picture of the farm economy in the Tenth Federal Reserve District, an area covering Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.
The report, based on a survey of district agricultural banks, shows a sharp drop in farm income in the third quarter, with about two-thirds of the bankers responding reporting lower farm incomes relative to the year-earlier quarter. The report notes that the findings were consistent with recent national forecasts. USDA, for example, expects farm incomes to drop 36 percent this year compared to 2014.
“Diminishing farm income cut agricultural producers’ spending levels, and credit conditions deteriorated further in the third quarter,” the bank concluded. “Following increased demand for renewals and extensions, and weaker repayment rates, many bankers expected the downturn to put more pressure on agricultural loan portfolios in the months ahead. Amid the downturn, credit availability also appeared to decline slightly despite the increased loan demand, raising some concern for producers seeking additional financing or debt restructuring toward year’s end.”
While the drop in capital spending was similar to that of farm income, fewer bankers reported a decline in household spending. Compared to the same period last year, 65 percent of survey respondents reported lower capital spending in the third quarter. However, only 35 percent indicated a decrease in household spending. Prior to 2013, household spending had tracked relatively closely with farm income and capital spending. Since 2013, however, household spending generally has been slower to come down, following what the bank called “multiple years of extraordinary profits.” A majority of surveyed bankers expected farm incomes to continue to fall, but some also noted that further reductions in household spending may be needed to maintain adequate working capital and cash flow.
The decline in farm income continues to raise concerns about the liquidity of some farm borrowers, the Fed reported. This year, 81 percent of bankers reported a significant or modest deterioration in the overall level of working capital for crop producers, up from 65 percent in 2014. Expectations of further slumps in District farm income have caused agricultural lenders to continue to stress the importance of maintaining adequate levels of working capital, especially for highly leveraged producers.
Increasing demand for farm loans and softening repayment rates have raised concerns about future farm loan performance. The majority of agricultural banks in the third quarter reported less than 5 percent of farm loan volume had been placed on a “classified” list or a “watch” list. However, 30 percent of District bankers reported an increased share of farm loan volume on the watch list from a year ago, and nearly half of bankers surveyed expected their classified list and watch list to expand over the next three months.
Waning farm income has also stifled growth in farmland values, the bank said. Although ranchland values continued to increase modestly, there was only minimal change from a year ago in the values of nonirrigated and irrigated cropland. Bankers also reported that they expected nonirrigated cropland, irrigated cropland and ranchland values to decrease in the next quarter.
A total of 200 agricultural banks responded to the Third Quarter Survey of Agricultural Credit Conditions in the Tenth Federal Reserve District. Agricultural banks are those with a greater percentage of agricultural loans in their loan portfolios than the national average of about 15 percent. The report was compiled by Nathan Kauffman, assistant vice president and Omaha Branch executive at the Kansas City Fed; Cortney Cowley, economist; and Matt Clark, assistant economist.
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