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Surging farm incomes spawn more ag lending

Though it's not without potential detractors in 2008, farm incomes are rising and causing a similar boost in farm lending, according to a recent report by the Federal Reserve Bank of Kansas City.

Record commodity prices and a good harvest season had the average farm income on the rise in 2007, and many farmers rode that wave to the bank in the form of both more spending and lending, according to Federal Reserve Bank economist Maria Akers and assistant vice president Jason Henderson.

"Record farm incomes are fueling a sharp rise in farm capital spending. Spending on farm equipment and grain storage facilities have surged in 2007," Akers and Henderson write. "Agricultural bankers report that capital spending increases are supporting a rise in loan demand.

"Surging farm income will more than offset rising input costs, up almost 10% in 2007, led by higher prices for fuel, fertilizer, seed and energy."

The influx of capital and corresponding investment growth isn't limited to Corn Belt farmers. Akers and Henderson say respondents to their recent survey of ag lenders around the country show that the trend reaches well beyond typical corn-and-soybean country.

"Bankers responding to the Federal Reserve agricultural credit surveys report strong capital spending. Bankers in the Kansas City District site additional capital investment by farmers, with a flurry of on-farm grain storage construction near ethanol plants," according to Akers and Henderson. "With rising farm income expectations, bankers in the Minneapolis District also report robust growth in capital spending. In the Richmond [Virginia] District, bankers noted increased spending on tobacco harvesting equipment and barn construction."

That's not to say the outlook is all bulls and roses for the next year, the Fed economists say. The ongoing rise in farmland values will continue its current trend. Though the overall value rise has slowed in the most recent quarter, the resulting influx of land on the market will translate into further value gains in this era of high commodity prices.

"Bankers in the Kansas City, Minneapolis and Chicago districts cited an increase in the amount of farmland offered for sale as escalating values are motivating some investors to cash out of the market," Akers and Henderson write. "Even with potentially more farmland on the market, bankers indicate that buyer interest remains high, which is facilitating the sale of more farms and spurring value gains.

"After a pause during the summer, robust income expectations may reignite a boom in farmland values."

This isn't the only risk facing farmers entering 2008, according to Akers and Henderson. Production costs and price volatility will remain at high levels in the coming year. With continued higher commodity prices will also come volatility in the ethanol industry.

"The tables are turning for the ethanol industry. Ethanol prices have fallen with a surge in ethanol production. Coupled with higher corn prices, the outlook for ethanol profits has deteriorated," Akers and Henderson say. From the farm perspective, leaner ethanol profits should not dramatically impact commodity demand as long as existing plants remain in operation."

The economists add that with continued operation, the nation's existing ethanol plants will continue to use corn at a clip near the 24% of the total U.S. crop supply in 2007. "Demand for corn should continue to support high corn prices directly and other crop prices indirectly as markets battle for planted acres," they add.

Yet, production costs will likely trump biofuels volatility as the greatest concern to farm incomes in 2008, according to Akers and Henderson.

"The direct challenge for the farm sector emerges in the costs of production," Akers and Henderson write. "In 2007, farm input costs rose 8.8%, led by rapid gains in interest, fertilizer, feed, seed, storage and transportation expenses. Futures markets indicate that natural gas and crude oil prices are expected to rise or remain high through 2008, which could translate into higher farm input costs."

In addition, strains to grain storage capacity, future price volatility and weather uncertainty will likely press the farm sector in 2008, according to the report by Akers and Henderson. But, this won't be enough to put a damper on the farm economy's value surge in 2008.

"Farm financial conditions have strengthened as farmers use increased incomes to pay off existing debt," Akers and Henderson write. "Thinner ethanol profits, higher production costs, nervous financial markets and ever-present weather concerns may cloud the horizon somewhat, but the farm outlook remains bright."

Though it's not without potential detractors in 2008, farm incomes are rising and causing a similar boost in farm lending, according to a recent report by the Federal Reserve Bank of Kansas City.

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