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Demand for Farm Loans Rises, Available Credit Drops, Fed Says
DES MOINES, Iowa (Agriculture.com)— With more evidence of falling farm income and increased demand for farm loans and loan extensions, economists Thursday encourage producers to stay focused on securing their operation's financial footing in 2016.
On Thursday, the Federal Reserve Banks of St. Louis and Kansas City released their findings of how the farm economy performed in the fourth quarter of 2015 and their outlooks for 2016.
During the fourth quarter of 2015, income continued to fall across Midwest and mid-South states that make up the The Eighth District including: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee, according to the St. Louis’s Fed’s district.
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; results lower than 100 indicate lower income), the farm income index value was 28. This was the sixth consecutive quarter that this value fell below 100, and the lowest level recorded since the survey began in 2012.
Looking ahead at the first quarter of 2016, an even greater percentage of bankers indicated they expect income to continue to decline.
Farm Income, Expenditures Fall
Amid the ongoing downturn in farm income, farmers and ranchers continued to scale back spending in the fourth quarter of 2015. Values for the index for household spending and the index for farm capital equipment expenditures again fell to their lowest levels since the survey began in 2012. Bankers expect expenditures in both categories to continue to decline in early 2016. “Crop and cattle prices are down, but input costs are rising at a slower pace," a Kentucky lender said. “I expect capital expenditures to decrease along with devaluation in farm real estate.”
Brent Gloy and Divid Widmar, purveyors of ageconomists.com, have offered nine tips for farmers to secure their operation’s footing in 2016. “The nine tips are superrelevant, right now,” Gloy says. “The need for farmers to take this report seriously is real.”
Gloy and Widmar urge farmers to stay focused on costs, manage working capital, pay attention to debt repayment capacity, and pursue good deals (farm or equipment purchases) with discipline.
Meanwhile, cropland values in the St. Louis’s Fed’s district fell by 2.5% compared with a year earlier, as ranchland and grazing pastures dropped by 5.3%.
Meanwhile, cash rents for quality farmland plummeted while rents for ranchland or pastureland rose. Cash rents for quality farmland fell 9.5% in the fourth quarter of 2015 compared with a year earlier. In contrast, cash rents for ranchland or pastureland rose 8.6% during this period. Looking ahead for the first quarter of 2016, bankers said they expect that cash rents will decline for both quality farmland and pastureland or ranchland.
Gloy says the good news for farmers is that cash rents are falling. "Because farmers' fixed costs were not falling before, rent rates were causing a squeeze on financials. But, those costs are now falling. Farmers should be careful with their cash rental agreements," Gloy says.
Quality Farmland, Ranchland, and Pastureland Values Fall
During the fourth quarter of 2015, bankers reported that quality farmland values fell slightly, down 2.5% compared with this period the previous year. Ranchland or pastureland values also fell during the fourth quarter, down 5.3% compared with a year earlier and the largest decline since the second quarter of 2014. A majority of the bankers surveyed said they expect both quality farmland and ranchland or pastureland prices to continue to decline in 2016.
Demand for Farm Loans Rises
Farm loan repayment rates slipped further in the fourth quarter while farm loan demand remained high, according to Kansas City’s Fed’s region of states.
“Moreover, both loan demand and repayment rates moved in similar directions in all District states. Through the fourth quarter, softening repayments rates and strong loan demand appeared to be a reflection of persistently weaker farm income and reduced cash flow. Yet, commercial banks generally continued to report low delinquency rates on agricultural loans, as shown in the Federal Reserve Bank of Kansas City’s first quarter, according to the Kansas City Fed Reserve Bank press release.
Less Farm Credit Available
Softening farm income and consistently strong loan demand appeared to also reduce credit availability for some borrowers in the fourth quarter. “The fourth quarter marked the 11th consecutive quarter of increased loan demand and the second straight quarter of diminished availability of funds for agricultural loans,” the Reserve Bank stated in its release.
In addition to strong demand for farm loans, the recent surge in loan renewals and extensions and weaker repayment rates likely has reduced principal payments, thereby restricting the availability of funds for new loans.
Bankers also indicated they expect credit availability to tighten somewhat in the first quarter of 2016, which would mark the longest period of reduced availability of funds at agricultural banks in the District since 2000, according to the release.