Survey: Farm Income, Spending Up; Higher Input Costs Foreshadow Risks Ahead

While first quarter 2013 farm income and capital spending were higher than expected across the Midwest and Mid-South than first quarter 2012, agricultural lenders remained cautious in their expectations for the year ahead amid risks posed by ongoing weakness in the U.S. economy and higher producer input costs, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis.

The survey for the report was conducted from March 15 through March 29, 2013. The results were based on the responses of 55 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 Mid-South States: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. It is broken into four zones: Little Rock, Louisville, Memphis and St. Louis. For this survey, three questions were added to assess potential change in farm sector risks.

Farm Income

On average, lenders across the District reported higher than expected first quarter income and spending.

“Actual farm income, household spending and outlays for capital expenditures all surpassed expectations of District bankers, as did loan repayment rates,” the report stated.

Using variables based on diffusion index methodology, survey results showed realized income versus expected income was 117 versus 86 for the first quarter of 2013 across the District. (In the diffusion index, 101-200 indicates higher realized income—based on survey responses—than a year ago, while 0-99 indicates lower realized income than a year ago. A value of 100 indicates the same as a year ago.)

Broken down by zone, the diffusion index for realized versus expected income was 120 versus 100 in Little Rock; 100 versus 83 in Louisville; 163 versus 113 in Memphis, and 100 versus 71 in St Louis.

In regard to capital spending across the District in the first quarter, the diffusion index was 128, compared with a previously expected value of 89. By zone, the diffusion index for realized versus expected capital spending was 140 versus 100 in Little Rock; 133 versus 83 in Louisville; 163 versus 100 in Memphis, and 106 compared with 82 in St. Louis. Meanwhile, household spending across the District saw a realized value of 129, compared with an expectations value of 109.

Looking ahead to the second quarter of 2013, lenders indicated they cautiously expected farm income, as well as capital and household spending, to be about the same, or slightly lower, than a year ago.

Farmland Values

Meanwhile, reported quality farmland, ranch and pastureland prices in the Eighth District were down slightly relative to last quarter’s price expectations. However, looking forward into second quarter 2013, lenders expected prices to rise slightly.

“As in our previous three surveys, bankers, on net, expect land values and cash rents to continue rising,” the report said. “However, it appears that banker expectations for future land value increases have moderated somewhat as fewer responses indicate that agricultural land values will continue to climb over the next quarter. Following that trend, bankers have also moderately tempered their short-term expectations for cash rents across the District.”

Lenders estimated that overall District quality farmland prices for the first quarter 2013 decreased by an average 2.3% to $5,111 per acre, compared with fourth quarter 2012. Meanwhile, ranch or pastureland prices decreased by an average of 5.1% to $2,274 per acre. Similarly, cash rents of quality farmland declined an average of 8.6% to $171 per acre, while ranch or pastureland prices fell an average of 4.5% to $120 per acre.

For the second quarter of 2013, lenders expected land values and cash rents to rise, albeit at a more modest pace. Again using diffusion index methodology, the expectations index for three-month growth in quality farmland for the District was 120. By zone, it was 100 in Little Rock, 113 in Louisville, 130 in Memphis and 121 in St. Louis. For ranch and pastureland prices, the average expectations index for three-month growth across the District was 120. By zone, it was 100 in Little Rock, 117 in Louisville, 138 in Memphis and 117 in St. Louis.

Ag Loan Demand And Repayments

Demand for agricultural loans across the District remained generally flat in the first quarter compared with a year ago. By zone, bankers in St. Louis generally reported a decline in loan demand, while those in the Memphis zone reported an increase.

Expectations for loan demand for second quarter 2013 ranged from flat in the Louisville and Memphis zones, to higher demand in the St. Louis and Little Rock zones.

“The availability of funds to lend remains high as all zones other than the Little Rock zones report more lendable funds available this quarter relative to a year ago,” according to the report, which also noted that loan repayments across the District were also higher than a year ago.

Special Questions

Given the severe drought conditions that affected much of Eighth District production in 2012, the survey included three additional questions to gauge what lenders saw as the greatest potential risks ahead in 2013.

The first question, to assess the financial condition of crop producers, revealed that 51% of agricultural lenders indicated a modest-to-significant improvement in the financial condition of crop producers for the District as a whole, while 31% indicated no change and 18%  indicated only modest deterioration. No one observed a significant deterioration. “On net, responses seem to confirm that elevated crop prices and record-level crop insurance payments supported farm income in 2012,” the report stated.

The second question, regarding the financial condition of livestock and poultry producers, showed 21% of lenders reported modest-to-significant improvement from a year ago. Meanwhile, 47% reported no change, while 32% reported modest-to-significant deterioration. “Survey responses seem to confirm that most protein producers (livestock and poultry) are ‘weathering the storm’ of higher input costs, but have not fared as well as crop producers,” according to the report.

The final question asked lenders to select what they considered to be the most significant risk to the farming sector in 2013. The responses revealed that 50% considered the weak economy to be the most serious risk, with 35% citing higher input costs. Only 2% considered higher interest rates to be a significant risk, with another 2% citing a decline in land values. Of the 10% who reported “other,” they cited drought and commodity prices as the most significant. “It appears that a weak economy that potentially limits revenue growth in the farm sector, followed by or along with, a rise in input costs that squeezes profit margins, are the most significant farm sector risks District respondents foresee in 2013,” the report concluded.

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