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Federal Reserve reports mixed conditions for agFederal Reserve reports mixed conditions for ag

Risks remain alongside persistently weak agricultural economy.

Krissa Welshans 1

October 25, 2017

5 Min Read
Federal Reserve reports mixed conditions for ag

Overall economic activity reports from all 12 Federal Reserve Bank districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate, the Federal Reserve’s latest “Beige Book October 2017” reported.

Most notable in the report was that the Richmond, Va.; Atlanta, Ga., and Dallas, Texas, districts experienced major disruptions from hurricanes Harvey and Irma in some areas and sectors, including transportation, energy and agriculture.

Specific to agriculture, both the Dallas and Atlanta districts said the full impact is still unknown.

“Although damage assessments are still being made, Irma’s heavy rains and high winds resulted in significant damage to Florida’s agriculture industry, as well as crop damage in parts of Georgia and Alabama,” the Atlanta district reported.

The Dallas district said Hurricane Harvey hampered agriculture in the Coastal Plains.

“The extent of the impact is not yet known, but some livestock were lost, and a small portion of the Texas cotton crop was damaged. Some rice and soybeans were also affected, but likely minimally,” the district report.

Overall, agricultural conditions for the 12 districts were mixed, and although some regions reported better-than-expected harvests, the report relayed that low commodity prices have continued to weigh down farm incomes.

The Federal Reserve Bank of Chicago, Ill., noted that both the corn and soybean harvests will be close to trend but still smaller than last year’s record crops.

“On balance, crop conditions worsened in late August and September as drought conditions spread in the district. In addition, suboptimal weather conditions earlier in the year meant crops were less mature than normal and that the harvest started later than usual,” the region reported.

Corn prices moved down but were still higher than a year ago, while soybean prices were little changed, although slightly lower than a year ago.

“With the exception of eggs, livestock and dairy prices were down as supplies stayed plentiful,” the Chicago district said.

Prospects for agricultural incomes declined overall during the reporting period, the district noted.

The St. Louis, Mo., district said agricultural conditions improved modestly from the previous reporting period. Farmers in the region indicated that they have been impressed by harvest numbers so far.

“Production and yield forecasts improved from August to September for corn, cotton and soybeans,” the district said.

Relative to 2016, cotton and soybean production levels in the St. Louis district were projected to be higher, while those for corn and rice were projected to be lower.

In the Minneapolis, Minn., district, agricultural conditions improved slightly from the previous report but remained weak overall.

“Though drought conditions eased, large areas of Montana and the Dakotas remained exceptionally dry, and much of the damage to crops had already been done. Early indications were that the wheat harvest might be better than expected in these areas but still well below average,” the district reported.

Areas not affected by drought were generally expecting good yields, but harvests have been delayed by rains, the region noted.

The Kansas City, Mo., district's farm economy continued to soften but showed some signs of stabilization since the previous reporting period. Farm income in the district was lower than a year ago, but some agricultural commodity prices rebounded slightly.

“Soybean prices increased modestly from the previous reporting period, and yield expectations remained strong,” the district reported. “Wheat prices remained flat but were higher than a year ago. Corn prices declined slightly amid strong production expectations, but district contacts expected strong crop yields to offset some weakness in prices.”

Cattle and hog prices for the region declined slightly from the previous reporting period but still remained higher than a year ago.

Farmland values also declined modestly in some regions but generally remained steady in areas with strong crop production.

Farm lending stabilizes

Nathan Kauffman, assistant vice president and Omaha, Neb., branch executive, and Matt Clark, assistant economist, noted in a recently released Federal Reserve Bank of Kansas City report that lending at agricultural banks appeared to stabilize in the third quarter of 2017. However, they said risks in the sector have remained, alongside a persistently weak agricultural economy.

“After declining in the winter months, the volume of loans used to finance non-real estate farm purchases rebounded in the third quarter to a level similar to a year ago,” they wrote.

Despite the rebound in lending activity, however, Kauffman and Clark said risk ratings on new farm loans have increased somewhat, interest rates have edged higher and loan-to-deposit ratios — a key measure of bank liquidity — also have increased.

According to the report, demand for operating loans was the primary driver of the non-real estate lending in the third quarter. In fact, the volume of loans used to pay for current operating expenses increased 15% from the previous year, whereas the volume of loans used to finance livestock and equipment purchases declined.

Further, Kauffman and Clark pointed out that operating loans have accounted for nearly 60% of the total volume of non-real estate farm loans over the past four quarters, which is the highest in the 40-year history of the survey.

The report also noted that farm debt outstanding at commercial banks continued to build in the second quarter, but at only a modest pace. “Despite the modest pace of growth in farm debt, liquidity at agricultural banks has continued to decline at a gradual pace,” it added.

The average loan-to-deposit ratio at agricultural banks has increased from 71% in 2012 to 81% in 2017. Loan-to-deposit ratios at highly concentrated agricultural banks (those with a ratio of agricultural loans to risk-based capital of at least 300%) have increased to more than 90%.

Kauffman and Clark said although there are some concerns about liquidity at agricultural banks and the performance of farm loan portfolios, profitability at agricultural banks has remained steady.

Nonetheless, they said some borrowers may find it increasingly difficult to obtain credit amid low profits. In addition, rising loan-to-deposit ratios at many agricultural banks also may induce more caution in the months ahead.

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