Farm income and credit conditions continued to deteriorate in the third quarter of 2018, according to the Tenth District Survey of Agricultural Credit Conditions. Expectations for farm income and loan repayment rates were lowest for areas and operations more concentrated in soybean, corn, hog and dairy production as uncertainties surrounding trade continued.
Alongside lower repayment rates, working capital deteriorated moderately while bankers’ loan portfolios in crop-producing states showed slightly higher levels of risk. Although farmland values remained stable, increasing stress in the farm sector could put downward pressure on farm real estate moving forward.
Farm Income and Farmland Values
The decline in farm income accelerated slightly in the third quarter. Heading into the fall harvest, prices for most major commodities remained lower than a year ago amid elevated supply expectations and ongoing trade disruptions. Throughout the Tenth District, more than half of bankers reported lower farm income compared to a year ago, while less than 5 percent reported higher income (Chart 1).
The drop was sharpest in states with higher concentrations in corn and soybeans. For example, more than 80 percent of bankers in Missouri and 60 percent of bankers in Nebraska reported lower income.
Farm income also was expected to weaken in coming months. Bankers in most states thought farm income would decrease but at a slower pace than in 2017 (Chart 2). Farm income was projected to decline at the fastest pace in states with higher concentrations of corn and soybeans.
U.S. soybean exports to China were down 91 percent in the third quarter, elevating concerns that fourth-quarter exports also could decline significantly. More than 70 percent of respondents anticipated lower income in the next three months in Missouri and Nebraska, states where soybeans comprise 27 and 15 percent of farm revenues, respectively.
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In addition to lower commodity prices, rising production costs remained an important factor for farm finances. Despite prolonged weaknesses in the farm economy and recent declines in farm income, cash rents have decreased only modestly and have appeared to stabilize in recent quarters (Chart 3).
In fact, cash rents for ranchland increased almost 5 percent from a year ago. In addition, cash rents for irrigated farmland fell at the slowest pace since 2013 and the downward trend in nonirrigated farmland rents remained modest.
Higher interest rates also could put some upward pressure on financing costs, but interest rates still remain below the recent historical average. Despite increasing at a faster pace, rates on farm loans remained well below pre-recession levels (Chart 4). From 2006 to 2014, variable interest rates on operating loans decreased nearly 300 basis points.
Since 2014, however, rates have increased nearly 100 basis points. As interest rates have risen, interest expenses increasingly have become an important component of farm profitability, but so far, the increase in interest expenses has been modest.
The prolonged period of depressed farm income has placed more pressure on borrower balance sheets. According to bankers across the District, a majority of crop producers in 2018 had a modest deterioration in working capital (Chart 5). While the number of bankers reporting no change in borrower liquidity increased in 2018, signs of continued weakness remained.
For the fifth straight year, a majority of bankers reported having borrowers with some depletion of short-term operating funds.
Stress on farm finances also contributed to an increase in the expected sale of mid- to long-term assets in 2018. The number of bankers expecting farm borrowers to sell assets to improve available working capital or make loan payments increased sharply from a year ago (Chart 6). In fact, nearly 85 percent of bankers reported that farm borrowers plan to sell mid- to long-term assets before year’s end, up from about 75 percent a year ago.
Alongside lower farm income and declining liquidity, a majority of bankers expected farmland values to decrease in the next quarter, but at a slower pace than in previous years. Similar to expectations for farm income, bankers in Nebraska, Kansas and western Missouri were also most pessimistic about the outlook for farmland values (Chart 7).
Despite predicted declines, further deterioration of farm finances and rising interest rates, nonirrigated farmland values across the District decreased only 2 percent from a year ago.
Alongside lower farm income, demand for farm loans increased. Although a majority of the District’s agricultural lenders have reported higher loan demand for five years, the pace of growth was the highest since the second quarter of 2016 (Chart 8). Some District bankers commented that increasing production expenses and lower commodity prices added stress to farm borrowers and likely boosted third-quarter demand for non-real estate farm loans.
In addition to higher loan demand, a majority of Tenth District bankers reported lower repayment rates on farm loans, although the pace of the decline remained stable. Bankers commented that some producers benefited from improved cattle markets, and repayment rates for cow/calf operations were higher for the second year in a row (Chart 9).
Although the overall pace of decline in repayment rates remained stable—likely due to the influence of cattle markets—repayment rates for corn, soybean, hog and dairy operations declined faster than in 2017.
The faster decline in repayment rates on soybean, dairy and hog operations highlighted concerns of oversupply and trade uncertainty in key agricultural industries. In the milk and hog industries, production has steadily increased over the past decade (Chart 10). In addition, hog exports declined slightly in the third quarter compared to both the previous quarter and previous year, and dairy exports remained flat.
Supply and demand issues in both industries have weighed on prices. Similar to other commodities affected by large supplies and trade disputes, low prices for milk and pork have reduced cash flow and darkened the outlook for farm finances.
Lower repayment rates likely have contributed to expanded credit monitoring practices. Similar to expectations for farm income, farmland values and repayment rates, problem loan lists were relatively larger in states with higher concentrations of corn and soybeans (Chart 11).
For example, bankers in Missouri and Nebraska reported the largest increases in both watch and classified lists. Although the average size of classified lists declined slightly in Kansas, watch lists in the state increased from 11 percent of farm loan portfolios in 2017 to 15 percent in 2018.
Farm income in the third quarter declined across the Tenth District. A majority of bankers expected repayment rates to decrease at a faster pace for soybean, hog and dairy operations, which seemed to reflect growing stress from elevated supplies and trade uncertainty in these industries.
Lower income continued to strain working capital and the share of bankers with operators planning to sell mid- to long-term assets increased from a year ago. Farmland values remained stable and continued to support agricultural credit conditions. However, lower farm income and reduced liquidity could weigh on farmland values in future quarters.