Farmland Lower, Ranchland Higher - KC Fed
A combination of high input costs, lower crop prices, and expectations for a sharply drought-shortened winter wheat crop this summer has crop farm incomes - and expectations for them moving through the remainder of the year - slumping. On the flip side, cattle and hog farmers have seen brighter returns in the last few months. Add it all up, and you've got a recipe for lower farmland values but a slight increase in ranchland values.
That's according to the latest survey of ag lenders in the Federal Reserve Bank of Kansas City's district on farm credit conditions. The Kansas City Fed district comprises Colorado, Kansas, Nebraska, Wyoming, northern New Mexico, and western Missouri. The first quarter of 2014, says Fed Omaha Branch Executive Nathan Kauffman, saw land prices closely track what's happening on farm balance sheets.
"Recent movements in District farmland values have echoed farm income trends. Expectations of lower profits for crop producers have generally halted the rise in District cropland prices. In fact, the value of nonirrigated farmland dipped 1.4% from the fourth quarter of 2013 to the first quarter of 2014, and irrigated farmland values rose just 0.5%," Kauffman says of the results of the survey, which comprised 228 ag lenders' feedback. "In contrast, strong demand for high-quality grazing pastures bolstered ranchland values, which increased 2.6% from the fourth quarter of 2013.
"In keeping with these trends, some bankers expected additional easing in cropland values in the next three months but felt ranchland values could strengthen further."
In parts of the Kansas City Fed district where more farms rely on crop income, the income disparity since the previous quarter was wider. In other words, the more pasture - at least where drought hasn't gutted grassland conditions - the better that farm incomes have weathered the income downturn underway the last few months in the nation's center.
"The dichotomy between the outlook for the crop and livestock sectors of the agricultural economy was also reflected in regional differences around the District. Changes in farm income and land values have been more dramatic in states heavily dependent on corn, soybean, and wheat production, such as Kansas and Nebraska. As corn prices have moderated sharply from a year ago, cropland value gains in both Kansas and Nebraska have also slowed dramatically or even declined," Kauffman says. "Conversely, farm income fluctuations and nonirrigated land value gains have not been as extreme in Oklahoma where crop production is less prevalent. In Oklahoma, 10 million acres of field crops were planted in 2013, far less than the 20 million acres in Nebraska and 23 million acres in Kansas. Farm income and ranchland value gains in Oklahoma led the District in the first quarter primarily due to strong prices in the livestock sector as well as land-lease revenue from energy exploration and extraction."
Taking both sides - crop and livestock - into account, it adds up to a general financial picture that, while lower in general than a year ago, is still manageable for most farmers, according to Kauffman's survey of ag lenders. Loan repayment has declined slightly, but in general, the ag sector is not likely to fall off a cliff soon in the Fed's Kansas City district.
"With lower profits extending into 2014, slightly more than half of District bankers reported a modest deterioration in the financial condition of crop producers relative to a year ago. Bankers reported that more requests for loan renewals and extensions were evident in a slight rise in carry-over debt compared with last year. In addition, loan repayment rates softened in the first quarter and were expected to weaken further in the coming months. Overall, lower income supported increased demand for farm operating loans and lessened interest in farm capital spending," the Fed economist says. "Still, bankers reported the supply of funds for farm loans remained sufficient to satisfy additional borrowing and that interest rates on farm loans held steady. A majority of bankers indicated collateral requirements remained basically unchanged despite a slight decline in loan repayment rates."