Federal Reserve Banks: Was second quarter just a blip?

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Federal Reserve Banks provided land value and credit condition summaries from second-quarter 2014 ag lender surveys. As always, state and district averages may not reflect local conditions.

Chicago

Partly buoyed by a spring rally in corn and soybean prices, second-quarter 2014 average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin) were up 2% on the quarter and 3% from a year ago. But, given the downward trends in crop prices, the increases may turn out to have been blips, and farmland values may have already plateaued, according to David Oppedahl, business economist. Only 2% of survey respondents anticipated farmland values to rise during the third quarter of 2014, while 30% predicted them to fall, and 68% expected them to be stable.

Back in the second quarter, however, only Iowa exhibited a year-over-year decline in agricultural land values, and only Indiana had a quarterly decrease. Profitability in the livestock sector served to counteract some of the weakness in the crop sector. In particular, the improved bottom line for dairy operations corresponded with a boost in demand for farmland in some areas. For instance, the surge in dairy farming profits was consistent with Wisconsin’s 6% jump in quarterly farmland values.

Ag credit conditions weakened somewhat in the second quarter of 2014 relative to a year ago. Repayment rates for non-real-estate farm loans were lower, even though ag loans with “major” or “severe” repayment problems still made up less than 2% of the district loan portfolio. There was evidence of a small shift of repayment problems from Wisconsin to states that produce more corn and soybeans. Also, 13% of the survey respondents observed more loan renewals and extensions over the April-June period compared with the same period last year; 6% observed fewer of them.

Demand for non-real-estate loans was higher than a year earlier, and bankers expected loan volumes – especially those for operating loans – to increase in the third quarter of 2014 relative to the same quarter of 2013. Volumes for farm machinery and grain storage construction loans were forecasted to fall.

Survey respondents generally anticipated farm real estate loan volumes to be lower. However, bankers from Wisconsin expected higher farm real estate and dairy loan volumes, largely because of anticipated profits from dairy farming.

Collateral requirements for loans tightened somewhat in the quarter. On the whole, banks had more funds available to lend in the second quarter of 2014 than a year ago.

Interest rates on farm operating and feeder cattle loans moved lower, while those on farm real estate loans were essentially unchanged (see Table 1).

 

Table 1. Variable loan average interest rates, April 1 & July 1, 2014

 

 

Federal Reserve Bank Districts

 

 

 

 

 

Chicago

 

Kansas City

Dallas

 

St. Louis

 

Type of loan

April 1

July 1

April 1

July 1

April 1

July 1

April 1

July 1

Operating

4.93

4.86

5.78

5.74

5.84

5.75

4.84

4.94

Intermediate

5.07

4.98

5.55

5.46

5.77

5.64

5.02

5.18

Real estate

4.66

4.67

5.41

5.38

5.43

5.3

4.77

4.82

Source: Quarterly district Federal Reserve Bank reports

 

 

 











Kansas City

The situation was similar in the Federal Reserve Bank of Kansas City (covering Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri), according to Nathan Kauffman, Omaha branch executive, and Maria Akers, associate economist.

Cropland values generally held steady in the second quarter. Although still above year-ago levels by about 6%, the quarterly change in non-irrigated and irrigated cropland values was less than 1%. Ranchland values – supported by demand from the livestock sector for high-quality pastures – increased more than 2% during the quarter, and remained a little more than 9% above year-ago levels.

Gains in farmland values varied by state. Annual value gains were lowest in Nebraska, and gains also moderated in Kansas and Missouri, although several years of drought in Kansas supported higher values for irrigated cropland. Bankers in Oklahoma, Wyoming, Colorado and northern New Mexico reported the strongest year-over-year gains in farmland values in the second quarter, due in part to land lease revenues from energy production and easing drought conditions.

Districtwide, current trends in farmland values were expected to continue for the rest of the growing season, with cropland values holding at high levels and ranchland values rising further.

Credit conditions held relatively steady, but there are some emerging risks due to lower farm income. While past profits and crop insurance may help mitigate shrinking margins in 2014, financial stress for crop producers could mount in 2015 if net returns do not improve. In addition, should a large fall harvest keep prices low through the beginning of next year, crop insurance might not provide a comparable level of revenue protection in 2015. Looking forward, loan quality may become more of a concern beyond 2014 if repayment rates come under additional pressure from declining profit margins.

Although bankers in the Kansas City district reported very few past-due farm loans, loan repayment rates have weakened since last year. The largest declines have been in states heavily dependent on crop production, particularly Nebraska. In contrast, loan repayment rates in Oklahoma strengthened in the second quarter along with improved profitability in the cattle sector.

In addition to softening repayment rates, bankers also reported a rise in the number of loan renewals and extensions over the past year.

Credit standards were little changed. Collateral requirements on farm loans generally held firm, and loan-to-value ratios remained relatively conservative. Loan terms remained favorable, with interest rates holding at low levels, averaging 5.7% on operating loans, 5.5% on farm machinery loans and 5.4% on farm real estate loans.

 

Dallas

Bankers in the Federal Reserve Bank of Dallas (covering all or portions of Texas, New Mexico and Louisiana) reported timely rains were very beneficial, but a few contacts noted crop damage from hail and strong winds. Row crops were in good condition because of the rain, giving producers and respondents a more positive outlook. Cattle prices continued to increase, but livestock numbers remained low as restocking of herds was minimal.

District dryland values continued rising in the second quarter, but irrigated cropland and ranchland values were slightly lower. However, farmland values for all land types were above year-ago levels. Dryland values increased almost 6% over last year, while irrigated cropland and ranchland were up about 5% compared with last year. Farmland values were anticipated to continue trending up in the third quarter.

 

St. Louis

On average, prices for quality farmland, as well as ranch or pastureland prices, declined during the second quarter of 2014, according to bankers in the Federal Reserve Bank of St. Louis (covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee).

Quarterly farmland prices were down 0.42%, and down 3.5% on an annual basis. Farmland prices have now fallen 6.7% from peak levels reached in the fourth quarter of 2013. Ranch and pastureland prices also declined in the second quarter, down 7.4%, and were down 2.5% last year. Ranch and pastureland prices have fallen 7.5% from peak values reached in the fourth quarter of 2013.

Lenders expected prices for quality farmland prices to continue to decline in the third quarter of 2014 relative to the same period last year, but they expect ranch and pastureland price to rise slightly.

While quality farmland prices have declined, cash rents have increased to their highest levels since the St. Louis Fed began its Agricultural Finance Monitor survey in the second quarter of 2012. Quarterly average cash rents were up 4.9%, and lenders expected cash rents to remain steady in the third quarter. Meanwhile, lenders reported cash rents for ranch or pastureland fell 4.8% from the first quarter. Proportionately, more lenders reported that they expected cash rents will increase for ranch or pastureland in the third quarter relative to the same period a year ago.

Average farm income, farm household spending and capital equipment expenditures declined during the second quarter of 2014 compared with a year ago.

More bankers cited weaker agricultural loan demand in the quarter, but had slightly higher expectations for strengthened loan demand in the third quarter.

Interest rates rose modestly for all major variable-rate loan categories, while also rising for machinery/intermediate-term fixed-rate loans. Meanwhile, the interest rate on fixed-rate farm real estate loans declined.

 

Richmond and Minneapolis

Reports from Richmond and Minneapolis districts were not yet available.

 

District reports available

To see individual Federal Reserve district reports, go to these websites:

www.kansascityfed.org/research/indicatorsdata/agcredit/index.cfm?ealert=agcr0215

www.chicagofed.org/webpages/publications/agletter/index.cfm

• http://research.stlouisfed.org/publications/afm/

www.dallasfed.org/research/economy/ag.cfm

www.richmondfed.org/research/regional_economy/surveys_of_business_conditions/agricultural_credit/index.cfm

www.minneapolisfed.org/publications_papers/agcredit/index.cfm?

 


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