- Farm real estate markets in the Tenth District remained relatively stable in the fourth quarter of 2017.
- The district covers Colorado, Kansas
, Nebraska, Oklahoma, Wyoming, and portions of western Missouri and northern New Mexico
- The stability in farmland values was due, in part, to fewer sales, and a significant number of bankers expect values to remain steady in 2018.
- Farm income in the fourth quarter continued to decline, and credit conditions remained weak, but the pace of deterioration has continued to slow.
- The relative strength of farmland values has provided support for farm finances despite the ongoing pressure of low agricultural commodity prices on farm income.
Farmland markets held firm in the fourth quarter, according to the Tenth District Survey of Agricultural Credit Conditions. On average, values for all types of farmland declined only 3 percent from a year ago (Chart 1). Prior to the fourth quarter, farmland values had declined at an annual pace of 5-7 percent, but those declines appear to have slowed more recently. The value of irrigated cropland decreased only 2 percent in the fourth quarter after dropping 8 percent in the first quarter of 2017.
The recent stabilization of Tenth District farmland values has been driven by improvements in farm real estate markets in the western part of the District. In the eastern portion, values for all types of farmland during the last three years have remained relatively steady (Chart 2, left panel). In the western portion, however, values for farmland rebounded from steep declines in 2016 as economic conditions in the livestock sector improved (Chart 2, right panel).
Farm income continued to decline but at a slower pace than in previous quarters. In addition to some stabilization in farmland markets, smaller declines in farm income also suggested that the farm economy in the Tenth District may be stabilizing. Several bankers commented that producers seem to be adjusting slowly to lower commodity prices. One adjustment made by producers is a reduction in capital spending and household spending (Chart 6). These expenses continued to decrease in the fourth quarter, but also have shown some signs of stabilizing from sharper declines in 2016.
Similar to farm income, agricultural credit conditions stabilized modestly but continued to show signs of weakness. The pace of decline in farm loan repayment rates abated somewhat, as fewer bankers reported lower repayment rates compared to previous quarters (Chart 9). Demand for new farm loans and renewals or extensions on existing loans also increased at a slower rate than in previous quarters. Despite signs of stabilizing in the fourth quarter, bankers’ expectations were for loan demand to strengthen and loan repayment rates to weaken slightly in the first quarter of 2018.
Farm income declined in the fourth quarter and credit conditions remained relatively weak, but farm real estate continued to provide support for the District’s agricultural economy. Despite persistently low commodity prices, farmland values have remained relatively strong. Looking forward, fewer bankers expect farm income to decline in coming months, suggesting that economic conditions may continue to stabilize. Still, ongoing demand for financing amid a low income environment and slightly higher interest rates suggests that credit risks in the farm sector still remain a focus for 2018.
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.