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Farmers Holding on to More Acres -- Fed

The latest local farmland auction was the hottest ticket in many Midwest towns until the downturn in grain prices started cooling the market that saw values in some areas just about double in the last decade.

Land values are still "holding fairly steady" in many parts of the country, though the falling tide of grain prices and associated costs is starting to force more farmers to borrow more to cover operating costs: Some of them are having trouble making the payments on those increasing loan volumes, according to new information from the Federal Reserve Bank of Kansas City. Chief economist Nathan Kauffman says continued grain farm profit erosion will cause more of a decline in farmland values in the coming year. The downturn hasn't started yet, however.

"Farmland values in the Tenth District generally held steady in the fourth quarter of 2014 despite further declines in farm income. Most bankers surveyed, however, said they expect cropland values to fall in 2015 alongside reduced expectations for farm income. Amid shrinking profit margins, demand for operating loans to pay for crop inputs is expected to remain elevated, and some bankers expressed concern that loan repayment rates might deteriorate if weak profit margins persist," Kauffman says in the latest quarterly audit of land values in the Kansas City Fed district. "Bankers reported there was solid demand for good-quality cropland but limited desire for less productive ground. Cash-rental rates also had moderated only slightly from a year ago despite prospects of lower crop revenue in 2015. While tenants were concerned about weaker profit margins due to low crop prices and high input costs, landlords cited high property taxes during rent negotiations as justification for keeping rents steady."

The relative sustenance in the land market amid falling grain prices may be not only a sign of its strength, but it may also be a function of farmers being less apt to sell land, and the land that is selling isn't generating the furious bidding more common three to five years ago. Though some land market watchers say now is a good time to buy and sell farmland -- for different reasons -- most farmers still say they're either sustaining current acreage or growing it in the near future. In fact, 76% of farmers responding to a recent poll said they're either sticking to current acres or "looking to buy more" despite current sliding grain incomes.

Kauffman's latest KC Fed data reflect the poll's results; fewer farmers are putting land up for sale, and those acres that are changing hands are going mostly to farmers, likely a reflection of the slowdown in investor interest.

"Fewer farms for sale may be partially supporting current cropland values. Bankers indicated there was significantly less farmland on the market in 2014, and a higher portion was being sold to farmers than in 2013," according to Kauffman's report released this week. "A majority of farmers who expanded their land holdings said they planned to farm it themselves. Bankers said about 20% of farmland sales were to nonfarmers who planned to rent out the land for crop production. However, investment demand for farmland for recreational use or future real estate development was still relatively stable."

Still, big-ticket farm purchases have gone down in the Fed's 10th District, Kauffman says. More than half of the ag bankers responding to his survey said farm incomes are lower across the board. Despite this trend, the data is anything but consistent.

"As with farmland values, farm incomes also varied across district states. Lower commodity prices and elevated input costs continued to dampen farm income in Nebraska, Kansas, and western Missouri. In fact, farm income growth has weakened annually since 2010, particularly in crop-intensive states such as Nebraska. In contrast, bankers observed that producers in Oklahoma ended 2014 with higher incomes than a year ago," Kauffman says, adding that, for example, four-wheel-drive tractor sales have declined by just over 25% in the last year. "Although overall farm income continued to soften, livestock producers have experienced record profits. Profit margins remained particularly strong for cow/calf operators due to low feed costs and persistently high feeder cattle prices, which have been supported by reduced U.S. cattle inventories."

With land still being held tightly, grain incomes still in the tank, and farmers facing another year of subpar grain prices, these trends will likely continue, reflecting a deepening of the wound inflicted by lower grain prices on the entire ag sector. The first sign will be a continued increase in operating loan volume and growth -- albeit slight -- in loan delinquency, and more farmers having trouble making their payments.

"Bankers were positioned to meet increased demand for loans but are concerned that lower incomes might eventually hurt repayment rates. Loan repayment rates remained only slightly lower than last year, and requests for loan renewals and extensions rose modestly in the fourth quarter. Looking forward, however, bankers are anticipating further deterioration in loan repayment rates and increased requests for loan renewals and extensions. While collateral requirements were little changed in the fourth quarter and bankers noted funds were available for qualified borrowers, some survey respondents indicated credit standards may tighten in coming months," Kauffman says. "Following several years of strong income and gains in cropland values, 2014 appeared to be a turning point for crop producers in the Tenth District. Lower crop prices and elevated input costs trimmed profit margins and slowed cropland value appreciation. More producers borrowed to pay operating expenses, and loan repayment rates fell below year-ago levels. Looking forward, bankers expressed concern that tighter profit margins, higher debt levels, and a decline in cropland values may adversely affect farm loan performance in 2015."    

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