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Drought levels off land values, incomes

The rise in farmland values, ag operating loan demand and expectations for overall weaker farm incomes all slumped in the second quarter of 2012 on account of the worsening drought conditions across the nation's center.

The end of June saw ag lenders already looking for declining farm incomes when it's all said and done for 2012, according to the most recent survey of ag credit conditions conducted by the Federal Reserve Bank of Kansas City. It's a story that, for the second quarter of the year, started with one extreme and ended with the other, says the Fed's 10th District Omaha Branch Executive Jason Henderson.

"After early spring rains, emerging drought conditions wilted District farm income expectations during the second quarter. At the beginning of the quarter, precipitation in the southern portions of the District led to a rebound in winter wheat production and farm incomes," he says. "Yet, by the end of the quarter, intensifying drought conditions were cutting bankers’ expectations for farm income during the third quarter."

Despite these expectations, Henderson says many ag bankers responding to the survey said not all farmers will see income sink; many who have ample crop insurance and can still raise enough grain to justify running the combine will see enough income to break even, at least. The same is likely not true for most of the region's livestock producers.

"Bankers reported that livestock producers were bearing the biggest burden from the drought. Higher feed costs and lower cattle prices from forced herd liquidations were cutting livestock profits," Henderson says.

Beyond these fundamentals, Henderson reports operating loan volume was still fairly low in the second quarter of the year, but he expects that softness to harden, especially as farmers start moving toward harvest. The same is true for livestock farmers. But, on the bright side, at least there's plenty of money for those loans, and low interest rates will make it inexpensive to acquire.

"Bankers expected loan demand to strengthen in the third quarter as drought boosted production costs. Poor pastures prompted many cow/calf producers to pay higher forage costs. Rising corn prices were also increasing the costs for cattle feedlot, hog, dairy, and poultry enterprises," Henderson says. "Bankers indicated ample funds were available for farm loans and interest rates edged down further."

And, on top of it all, the stratospheric climb in farmland values eased in the second quarter as drought anxieties grew. Look for that trend to continue through the end of this year's crop is in the bin. "District farmland values rose less rapidly in the second quarter and remained well above year-ago levels," Henderson says. "Nonirrigated cropland values rose solidly and irrigated cropland values held steady. Looking forward, more than three-quarters of survey respondents expected farmland values to hold at current levels during the rest of the growing season."

Toward the end of the second quarter of 2012, ag lenders responding to the Fed's latest survey say they were starting to have grave concerns about the severity of the drought and how it will affect farm incomes moving forward. The most likely impact, Henderson says, will be in declining spending for big-ticket items on the farm. So, on one hand, loan volume will likely slide. But, on the other hand, operating loan volume will likely increase enough to make up for the difference.

"Bankers expected drought-reduced income to limit capital spending, but boost operating loan demand. After sluggish operating loan demand in the second quarter, rising fuel and feed expenses were expected to increase operating loan demand in the coming months," he says. "In contrast, intermediate-term loan demand for farm machinery and equipment was expected to fall with weaker farm income and capital spending. In addition, capital spending during the past year limited the demand for further equipment upgrades by some agricultural enterprises."

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