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St. Louis Fed Quarterly Ag Survey Shows Farm Income Continues To Decline in Midwest and Midsouth


Eighth District agricultural bankers reported a continued decline in farm income during the fourth quarter of 2014 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, they reported a slight increase in quality farmland and a modest decline in pastureland values relative to a year earlier.

The survey for the report was conducted from Dec. 15 - Dec. 31, 2014.  The results were based on the responses of 39 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Midsouth States: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

The fourth-quarter survey included two additional questions to assess recent farmland secured transactions and associated risks.

Farm Income and Expenditures Fall

Noting that farm income is highly volatile and subject to seasonal patterns, the report revealed a decline in farm income, farm household spending, and capital equipment expenditures during the fourth quarter of 2014 relative to the same period a year earlier.  In addition, lenders indicated they expected further declines in all three categories during the first quarter of 2015.

Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher lender values compared with the same quarter a year earlier; results lower than 100 indicate lower lender values), the fourth-quarter index value for farm income was 78, while first-quarter expectations for 2015 showed an index value of 61.

“Excellent yields have helped offset lower grain prices for most producers for the 2014 crop, but future incomes are expected to be reduced based on average yields and projected prices for the 2015 crop year,” a Missouri lender noted.

Quality Farmland Values Stable, But Expected To Decline

According to the survey, quality farmland values across the District were up 0.8 percent during the fourth quarter of 2014 from one year ago. However, proportionately more bankers indicated they expected prices to decrease over the next three months, as indicated by an index value of 87.  Meanwhile, ranchland or pastureland prices declined 2.6 percent during the fourth quarter from one year ago.

 “It is very difficult for farmers to buy farmland and new equipment with corn prices in the $3.50 range,” another Missouri lender said. “Many received much less for their crops this fall.  Farmers with a lot of debt cannot postpone the sale of their crop waiting for prices to rebound when they have payments due after harvest.”

While cash rent values for quality farmland were up 3.6 percent in the fourth quarter, lender expectations were lower for the first quarter of 2015, as indicated by an index value of 77. Cash rents for ranchland or pastureland were 2.1 percent lower in the fourth quarter of 2014, compared with a year ago.

Lending Conditions
During the fourth quarter of 2014, a modestly larger proportion of bankers reported an increase in loan demand relative to the same period a year ago, as indicated by an index level of 114. Bankers were equally divided, however, on loan demand over the next three months relative to a year ago, as indicated by an index value of 100. On the other hand, a larger number of bankers reported they expected loan repayment rates would fall in the first quarter of 2015 relative to a year ago, while availability of funds would remain high.

 Questions for Assessing Underwriting Practices

The survey asked lenders two additional questions to help assess recent underwriting practices and loan portfolio exposure to a potential sizable decline in farmland values. The answers revealed that on average, Eighth District lenders reported that 55 percent of the value of recent farmland transactions was financed with new debt, with 30 percent supported by a pledge of existing equity and 15 percent paid in cash. Regarding the assessment of loan portfolio exposure relative to the financial health of their borrowers, more than 80 percent of lenders reported that their portfolios contained less than 50 percent of real estate loans made to borrowers who are most exposed to an unexpected plunge in farmland prices.

 “Overall these responses, in aggregate, suggest that the credit underwriting of recent farmland secured transactions remains sound and less than half of farm real estate loans are held by more exposed or highly leveraged borrowers,” the report said.


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