After a sharp rebound at the end of 2020, the agricultural economy in the Tenth District continued to improve in the first quarter of 2021, according to an ag credit survey by the Kansas City Federal Reserve.
Ag credit conditions strengthened for the second consecutive quarter as crop prices, farm income, loan repayment rates and farmland values all increased, indicating strong profit potential for farm borrowers.
While conditions were better compared to 2020, the pace of improvement was slower for livestock producers, as well as those in areas affected by drought, mainly in western states. Cattle prices in Q1 were also below prepandemic levels. Government support, however, mitigated these challenges, and financial pressure that has been building in recent years appeared to have eased.
“It’s a confusing time,” said a banker from southwest Kansas in response to the survey. “Drought impacted a large area, however CFAP and various government program payments made a huge impact by year-end and the increased commodity prices have lifted spirits. Many producers have started selling commodities at very profitable levels, and most cash flows show a marked improvement.”
Repayment rates improved for farm loans across the region in the first quarter. The rate of repayment increased for the second consecutive quarter, following years of weakness. Two in five respondents to the survey reported increased repayment rates, the highest rate since 2012.
Loan demand was generally weak in the district, moreso in Nebraska and Kansas than in Oklahoma and Missouri. Farm income strengthened, though at a slower pace in areas with concentrated cattle production and drought exposure. Roughly two thirds of bankers in the region said farm income was higher than the previous year –– 80 percent of which were from Kansas, Missouri and Nebraska, while 40 percent and 20 percent, respectively, were from Oklahoma and the mountain states: Colorado, Wyoming and the northern half of New Mexico. Three quarters of bankers reported modest or significant conditions for crop producers, though only half said conditions for livestock producers improved. Improvement was slower in Oklahoma and the mountain states, where there’s a smaller share of farm revenue from corn and soybeans.
Borrower spending increased rapidly in the first quarter of 2021. The survey indicated increases in both capital and household spending, which is the first time in eight years that both measures increased in the same quarter. The trend is expected to continue in the second quarter.
With better financial conditions and less credit stress, the strain on borrowers eased across all states, though less in Oklahoma and the mountain states. In stark contrast to the previous five years, lenders turned down fewer shares of farm loans. Less than 2 percent of loan requests were denied due to cash flow shortages –– consistent across all states in the region.
Interest rates on farm loans also fell to historically low levels in the first quarter of 2021 after reaching highs in the first quarter of 2019. Low interest rates reduced farmers’ borrowing costs, likely supporting asset values. For ag banks, however, low interest rates have put negative pressure on their earnings.
Due to low interest rates and a stronger farm economy, however, farm real estate values increased across the district. Farmland value rose 8 percent in the first quarter, which is the largest annual increase for cropland in the first quarter since 2013. Ranchland values rose at the fastest pace since 2015.
Farm real estate was especially strong in states unaffected by drought. Nonirrigated cropland values in Kansas, Missouri and Nebtraska rose by atleast 8 percent. Cropland values were unchanged in the mountain states, where more than 70 percent of the area experienced drought.