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Farm Income Drop Pushes Operating Loans Higher -- Fed

Jeff Caldwell 04/30/2014 @ 1:06pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

Here's proof the farm economy is softening, just as many experts have been saying it would for the last few months: Operating loans for farms in the nation's center increased by almost one third in the first quarter of 2014 compared to the same time a year ago, according to a report from the Federal Reserve Bank of Kansas City released Wednesday.

Farm loan volume spiked in the first quarter of the year, with the vast majority of that rise accounting for short-term production and operating loans, according to a report from Federal Reserve Omaha branch executive Nathan Kauffman. Loans in the "non-real estate farm loan" category exceeded $100 billion for the Kansas City Fed region, up considerably from the last two years. While the jump was sharpest in this category, mid- and long-term loans for machinery and equipment actually fell during the same time period.

"Farm borrowing ramped up in the first quarter as farmers prepared for spring planting. Operating loan volumes reached a record high, exceeding year-ago levels by 28%. Crop prices at the beginning of 2014 had fallen 40% from the previous year, lowering cash receipts for producers still marketing fall crops," Kauffman says. "In addition, while prices fell for some crop inputs, such as fertilizer, others, such as seed and fuel, were expected to hold at high levels. Reduced cash flow coupled with elevated crop production costs contributed to the upswing in operating loan volumes.

"Farm borrowing ramped up in the first quarter as farmers prepared for spring planting. Operating loan volumes reached a record high, exceeding year-ago levels by 28%. Crop prices at the beginning of 2014 had fallen 40% from the previous year, lowering cash receipts for producers still marketing fall crops. In addition, while prices fell for some crop inputs, such as fertilizer, others, such as seed and fuel, were expected to hold at high levels. Reduced cash flow coupled with elevated crop production costs contributed to the upswing in operating loan volumes," he adds.

Another sign that the business of farming has mellowed over the last few boom years: Total farm debt outstanding was at its highest level at the end of 2013 since early 2009, and the rate of gain -- at 7% -- is higher than it's been in that same time period.

"The volume of loans secured by farmland rose 7.3%, followed closely by a 6.6% increase in production loans. A drop in crop prices at harvest tightened margins and may have contributed to the rise in production loan volumes at year-end," Kauffman says.

Specific to the farmland market, value gains definitely slowed down in the first quarter of 2014, but still stayed in the black in many areas while values dipped into the red in others, including some where gains have been sharpest in recent years. The ag lenders surveyed by Fed economists said they expect that to continue, with a few exceptions driven by outside factors.

"Agricultural bankers indicated that farmland value gains slowed dramatically in the fourth quarter despite less farmland for sale compared with last year. In particular, bankers in Corn Belt states reported year-over-year increases in nonirrigated cropland values moderated from previous highs. There was even a slight pullback in cropland values in parts of Minnesota and Iowa," Kauffman says. "Energy activity continued to support farmland value gains in the Dakotas, but a majority of bankers felt that lower farm income expectations for 2014 would limit further farmland value gains in major crop producing areas."

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