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Drought pushes operating loans higher

Just a few months ago, the number of farmers taking out operating loans was lower than normal, as farm incomes spurred by sharply higher grain prices were enough to make it easier to operate with cash on hand.

The drought has changed that immensely; so much so that the last quarter saw the quickest rise in years in operating loan volume among the farms in the Kansas City district of the Federal Reserve comprising the region from Colorado to Indiana and North Dakota to Texas.

Crop and livestock producers shared in the higher costs because of the drought, says Jason Henderson, Omaha branch executive for the Kansas City Fed in his latest quarterly report of ag credit conditions in the nation's center. Consequently, lending rose for both sectors.

"During the second quarter, farm operating loans rose at their fastest pace in five years. An August survey of national commercial banks revealed additional demand for short-term farm operating loans in the third quarter as input costs soared," Henderson says. "Lending to livestock operations jumped as feed costs spiked and herd liquidations boosted loans for feeder cattle. Higher fuel costs to power irrigation systems and harvest crops also increased lending to crop producers."

That's had some spillover effect on loans for capital spending vs. operating loans but little effect on the farmland marketplace. Land values essentially have tracked usual trends in the last three months despite a slip in loan volume for big-ticket purchases.

"Investment in farm machinery and equipment remained strong, although some bankers expected capital spending to slow as producers evaluated cash flow needs," Henderson says. "Bankers continued to report higher farmland values, although the pace of appreciation slowed from the previous quarter. Many agricultural bankers expected farmland values to stabilize until after harvest, when more farms would be put up for auction."

And, despite recent eye-popping farmland sale prices in the western Corn Belt, ground for cultivation isn't leading the way, valuewise at least, according to the farm lenders who contributed to the Fed's most recent survey of ag credit conditions.

"The strongest farmland value gains emerged in the central Plains where irrigation is prevalent, and the northern Plains where land lease revenues from mineral rights continued to climb," Henderson adds.

The sector that shouldered the greatest financial burden from the drought in the last few months in the Kansas City Fed district is livestock, especially for cattle feeders. Henderson says loan volume among feeders skyrocketed to two-year highs, eclipsing the volume from a year ago by 60%. "[That's] more than offsetting a drop in other types of livestock loans. Poor grazing conditions and a shortage of forage forced many livestock and dairy operators to liquidate herds, boosting the number of cattle on feed above year-ago levels," he says. "Profits in the livestock sector suffered under high feed costs. Drought...weighed on feeder cattle prices in the Kansas City District."

Fortunately, at least for crop producers, the ebb in drought-induced income was slowed by continued strong grain prices and crop insurance income. And, the better news for the ag lenders serving the crop producers in the region is that input costs were on the rise leading up to the last quarter, so the decline in capital loans wasn't much of a surprise.

"Despite poor growing conditions, record-high crop prices and widespread crop insurance coverage supported farm incomes and loan demand. Bankers in the Chicago, Kansas City, Minneapolis, and St. Louis districts reported that rising crop prices offset high input costs, boosting farm incomes," Henderson says. "Although operating loan activity increased with higher operating expenses, more bankers expected farm capital spending to cool as input costs rose."


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