Farm Economy Tightens Further
Farmland values in the Tenth District dipped again in the fourth quarter. According to respondents of the Tenth District Survey of Agricultural Credit Conditions, values of nonirrigated and irrigated cropland decreased 4 percent and 2 percent, respectively, from a year ago (Chart 1). With the fourth quarter declines, irrigated cropland values have fallen modestly in four consecutive quarters, and the value of nonirrigated cropland generally followed the same trend through 2015.
Chart 1: Tenth District Farmland Values
Growth in the value of ranchland also stalled in the fourth quarter alongside sharp declines in cattle prices that persisted to the end of the year. From January 2015 through December, feeder cattle prices plunged more than 25 percent, causing profit margins in the cattle sector to deteriorate significantly. Alongside these price declines, year-over-year growth in the value of ranchland dropped from an average of 8 percent in the first three quarters of 2015 to zero in the fourth quarter.
In contrast to most other District states, farmland values in Oklahoma continued to rise modestly. Oklahoma was also the only state where bankers reported increases in average cropland values when compared with the previous year. Ranchland values also continued to rise modestly in Oklahoma, in addition to the Mountain States (Table). Changes in farmland values in most other states, however, generally were consistent with average changes for the Tenth District as a whole.
Table: Tenth District Farmland Value Gains by State, Fourth Quarter 2015
Survey respondents expected farmland values to fall further in the coming months. In fact, bankers expected the value of each land type – nonirrigated cropland, irrigated cropland and ranchland – to decline again in the first quarter of 2016 (Chart 2). However, between the three land types, more bankers expected further losses in the value of nonirrigated cropland. Moreover, bankers expected slightly larger adjustments in nonirrigated cropland values in the coming year than what was expected at the same time a year ago (Chart 3).
The volume of farmland sales also dropped in 2015. Historically, changes in the volume of farmland sold and farmland values have moved together (Chart 4). Landowners may be less inclined to sell when prices have recently fallen, in hopes that prices might rebound in the future. A more limited supply of farmland available for purchase, then, may partly explain why farmland values have retracted only modestly, as demand has remained relatively strong in the meantime.
Chart 4: Change in Volume of Farmland Sales and Farmland Values
Similar to farmland values, cash rents softened in the fourth quarter. Cash rents for both nonirrigated and irrigated cropland edged lower at a pace similar to recent quarters (Chart 5). In contrast, ranchland cash rents continued to rise modestly, but were expected to soften in the coming months along with other land types (Chart 6).
Reduced farm income likely has contributed to expectations of further declines in both farmland values and cash rents. In the fourth quarter, 87 percent of survey respondents reported farm income was lower than a year ago (Chart 7). Reports of waning farm income also were consistent across District states. In fact, for the first time since 2002, bankers in all District states reported that farm income in the fourth quarter was lower than a year ago (Chart 8).
Persistently low prices for agricultural commodities remained a primary driver of diminished farm income across District states. In addition to sharp declines in cattle prices, most crop prices also fell from year-ago levels. For instance, national average prices for soybeans and wheat dropped 14 percent and 19 percent, respectively, while corn prices also declined slightly. Moreover, corn prices were nearly 40 percent lower, on average, in 2015 than two years earlier. Sustained weakness in corn, soybean and wheat prices has had a particularly negative effect on farm income because these three crops account for about 70 percent of harvested crop acreage in Tenth District states, according to the U.S. Department of Agriculture.
Bankers expected farm income to remain subdued in the coming months. For the second quarter in a row, bankers in all District states indicated they expect a further decline in farm income in the coming quarter (Chart 9). These expectations of lower farm income continued the trend of reduced incomes in Kansas, Missouri and Nebraska, but marked a significant downturn in expectations for future farm income in Oklahoma and the Mountain States.
Chart 9: Expected Tenth District Farm Income, Fourth Quarter
Farm credit conditions in the Tenth District also deteriorated somewhat alongside lower farm income. Farm loan repayment rates slipped further in the fourth quarter while farm loan demand remained high (Chart 10). Moreover, both loan demand and repayment rates moved in similar directions in all District states (Chart 11). Through the fourth quarter, softening repayments rates and strong loan demand appeared to be a reflection of persistently weaker farm income and reduced cash flow. Yet, commercial banks generally continued to report low delinquency rates on agricultural loans, as shown in the Federal Reserve Bank of Kansas City’s first quarter Agricultural Finance Databook.
Softening farm income and consistently strong loan demand appeared to also reduce credit availability for some borrowers in the fourth quarter. The fourth quarter marked the 11th consecutive quarter of increased loan demand and the second straight quarter of diminished availability of funds for agricultural loans (Chart 12). In addition to strong demand for farm loans, the recent surge in loan renewals and extensions and weaker repayment rates likely has reduced principal payments, thereby restricting the availability of funds for new loans. Bankers also indicated they expect credit availability to tighten somewhat in the first quarter of 2016, which would mark the longest period of reduced availability of funds at agricultural banks in the District since 2000.
Chart 12: Tenth District Available Funds
The effects of weakening farm income continued to ripple through the farm economy in the fourth quarter. Reduced income pushed cropland values lower and developments in cattle markets halted growth in ranchland values. In addition, lower farm income trimmed cash rents somewhat and was expected to continue to pressure agricultural credit conditions in the coming months.
The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.