Farm economy rebounds in Tenth Fed

Outlook for farm income and ag credit conditions rebounded in the fourth quarter of 2020, according to the Ag Credit Survey conducted by the Federal Reserve Bank of Kansas City. 

The average price of soybeans, wheat and corn increased more than 20 percent since the previous quarter, reaching a six-year high in December. Livestock prices also improved from lows hit earlier in 2020, though still less than they were a year ago. “Higher grain prices may lead to more pre-harvest crop sales, but higher feed costs for livestock production,” a survey respondent from central Kansas said. 

The price increases, paired with government payments throughout the year, notably improved farm sector prospects. “Direct payments have been beneficial and commodity prices have been going up substantially, which certainly benefits those who stored grain,”  a banker from northeast Kansas said. 

And after nearly eight years of decline, farm income also rebounded in the Tenth District. For the first time since 2012, the majority of respondents said the incomes of farm borrowers were higher than a year ago.  Eight in 10 bankers expected farm incomes for the whole year would be higher than initially predicted in early 2020 when considering government payments. Two in 10 respondents expected the increase to be significant. 

“With the CFAP payments and the increase of commodity prices, gross farm income will be quite a bit more for 2020 than previous years and real estate sales have increased significantly over the last 45 days,” a banker from southwest Missouri said. 

Sixty percent of respondents said that paying down farm debts and machinery were likely uses of extra income. A little less than half of bankers said another priority would be to improve working capital.

The turnaround in income, however, was less pronounced in Oklahoma and the Mountain States of Colorado, Wyoming and the northern half New Mexico.

Areas of the district exposed to drought and are more heavily dependent on livestock revenue were less optimistic about farm income. “We are in an extremely dry area at this point in time. Yields have been good for the past several years and current prices are good, but if the dry weather continues it will have a grave impact on this community,” a banker from northwest Kansas said.

The number of bankers who reported higher income than the year before was significantly smaller among those in Oklahoma and the Mountain States. Three in ten respondents from those states said their income was lower in the fourth quarter than it was the year before, compared with 8 percent, nearly one in ten bankers, in all other states in the district. “Most of our ag borrowers are pretty much going to sit tight and wait for COVID-19 to pass before making any large monetary decisions,” said a respondent from northern Colorado.

As farm financing prospects improved, so did farmland values across the region. The value of land increased roughly 4 percent from a year ago, which was the highest increase since 2014. Cash rents for nonirrigated and irrigated cropland increased, but at a slower pace than the value of the land. Cash rents on ranchland continued to ease. 

Farm real estate markets strengthened, in part due to a decrease in interest rates and a slight increase in demand for farmland. Producers accounted for a slightly higher share of land purchases that the previous two years. Low interest rates likely supported farm real estate markets by reducing financing costs and making farmland an attractive investment opportunity.  

As for the volume of farmland sales, the support of farm real estate markets has led to notable optimism regarding farmland values. Less than 15 percent of respondents expected non-irrigated cropland values to decline in the next 12 months, and more than 40 percent expected the values to increase. This year-end outlook starkly contrasts previous years’, when a similar portion expected values to decline.