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Farmers spending less on iron -- Fed

Grain prices have fallen. Farm incomes are seen sagging this year after a few fairly bountiful years. And now, the numbers reflect the trend that farm economy watchers have been predicting for a few months.

Farmers are generally spending less on big-ticket purchases, a fairly stark departure from the trend up until about a year ago, according to new information released by the Federal Reserve Bank of Kansas City. Omaha Fed branch executive Nathan Kauffman says the reversal is a clear sign that falling farm income potential in the face of continued high input costs is starting to drive a lot of major purchase decisions.

"The volume of loans for farm machinery and equipment purchases dropped to the lowest level in more than 2 years. This drop occurred despite attractive loan terms of low interest rates and longer average loan maturities," Kauffman says. "Elevated farm income and a decline in input costs dampened short-term lending to the farm sector in the fourth quarter. A rebound in crop production in most regions helped offset a sharp drop in corn prices at harvest, keeping farm income relatively high. In turn, lower corn prices reduced feed costs for livestock operators. Crop farmers also saw operating costs decline due, in part, to a decrease in fertilizer prices. With fewer operating loans being made, large lenders in particular competed for market share by offering further reductions in interest rates."

The big-ticket buying slowdown wasn't just in iron; lending for farmland purchases also saw a decline in the 4th quarter of last year. Like crop inputs, Kauffman says ag bankers surveyed by the Fed indicate they see land prices either remaining at or near current levels or dipping in the coming months, falling in line with the last few months' speculation that the market would turn lower.

"While farmland values generally were still rising, agricultural bankers reported gains had moderated from the brisk pace of the past few years," Kauffman says. "Most bankers felt that farmland values would hold steady at high levels heading into 2014."

But, it's far from all doom-and-gloom for ag bankers in the Kansas City Fed district; Kauffman says most ag banks are reporting signs of improving fiscal strength, namely in the returns they're seeing as asset returns continue to climb.

"With solid farm income, agricultural banks reported sound profits as the fall harvest season wound down. At the end of the third quarter, agricultural banks posted the second-highest average return on assets in 5 years. These returns have consistently surpassed returns reported at other banks," he says. "Delinquency rates on both farm real estate and non-real estate loans continued to trend down as bankers reported relatively high loan repayment rates."

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