Amid ongoing weakness in commodity prices, Midwest and Midsouth farm income and quality farmland values continued to decline during the first quarter of 2016, according to the latest "Agricultural Finance Monitor" published by the Federal Reserve Bank of St. Louis, Mo.
The survey for the report was conducted March 15-31, 2016. The results were based on the responses of 32 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The survey also included two special questions that asked bankers about farm loan portfolio repayment and the percentage of customers who had borrowed up to their loan limits.
Farm income, expenditures erode
During the first quarter, bankers reported that farm income continued to slide compared with the same period a year ago. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher income compared with the same quarter a year earlier, while results below 100 indicate lower income), the farm income index value declined for the seventh consecutive quarter to an all-time survey low of 20. The St. Louis Fed survey was launched in the fall of 2012.
"Lower commodity prices, in addition to no commodity subsidies, have made it difficult to realize a positive cash flow projection for 2016,” a Tennessee agricultural lender said.
The majority of bankers reported that the downturn in the farm sector continues to reduce expenditures, with the index values for household and capital spending also hitting all-time lows. The household spending index registered at 50, down sharply from the previous quarter’s value of 72. Meanwhile, the capital spending index fell to a level of 30, down from the previous quarter’s value of 38.
Quality farmland values drop
During the first quarter of 2016, bankers reported that quality farmland values plunged an average 6.4% from year-ago levels. This represented the steepest quarterly drop in the history of the survey. The value of ranchland or pastureland, on the other hand, remained steady compared with year-ago levels.
Looking ahead at the second quarter, a majority of the bankers surveyed said they expected to see declines for both quality farmland and ranchland or pastureland prices.
Cash rents for quality farmland and ranchland or pastureland also fell in the first quarter of 2016 compared with a year earlier. This trend is expected to continue into the second quarter.
Repayment rates for farm loans
The survey asked two special questions about repayment rates for banks’ farm loan portfolios.
The first question asked bankers to indicate the percentage of the dollar amounts of their farm loan portfolios in each of four repayment classifications. The vast majority of loans — about 78% — were classified as having no significant repayment problems. About 14% were classified as having minor repayment problems, with issues that could be remedied fairly easily. Meanwhile, close to 7% were classified as having major repayment problems that would require more collateral and/or long-term workout arrangements. Only 2% were classified as having severe repayment problems that would likely result in loan losses and/or forced sales of real assets.
The second question asked bankers to estimate the percentage of their customers who have borrowed up to their loan limit. On average, they indicated only 34% of customers had borrowed up to their limits.