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Farm incomes decline while farmland values rise: St. Louis Fed

Farm incomes decline while farmland values rise: St. Louis Fed

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ST. LOUIS ― While farm income continued to decline in the Midwest and Mid-South during the first quarter of 2017, values for quality farmland and ranchland or pastureland experienced the largest increases in three and a half years, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis.

The survey was conducted from March 15-March 31, 2017. The results were based on the responses of 32 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Mid-South states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The survey also included three special questions that focused on farm loan portfolios and bankers’ top concerns for 2017.

Farm Income Continues to Decline

Agricultural lenders continued to report lower farm income levels compared with a year earlier. Based on a diffusion index methodology with a base of 100 (results above 100 indicate higher income compared with the same quarter a year earlier; results lower than 100 indicate lower income), the diffusion index for farm income during the first quarter of 2017 was 55. This represents the 13th consecutive quarter of an income index below 100. Looking forward, fewer lenders – although still a majority – expect the income decline to continue in the second quarter.

“This development is heartening because it suggests that a rising number of bankers—though still a minority—are noting that farm income has stopped declining from year-earlier levels,” the report stated.

According to an Illinois lender, “Soybean prices held up well, which allowed farmers to market their 2016 crop at a higher price than projected. Although corn prices have trended lower, producing some concern for 2017 crop income, the majority of our customers are very good marketers and will do okay by holding their costs down.”

Quality Farmland Values Show Healthy Increase, Cash Rents Decline Slightly

Surprisingly, quality farmland values during the first quarter of 2017 were 10 percent higher than they were during the first quarter of 2016. Ranchland or pastureland values rose 7.2 percent during the same time period. In contrast, cash rents for quality farmland declined slightly from the year prior, but the declines were the smallest in more than a year.

“Real estate values fell in 2016; however, recent land sales are showing some strength, which has helped to bring prices back up slightly,” according to the Illinois lender.

Looking ahead, the majority of lenders did not expect this price growth to be sustained into the next quarter.

Special Questions Regarding Loan Portfolios and Bankers’ Top Concerns

The survey asked bankers three special questions covering the health of their loan portfolios, borrowing capacity of customers, and their top area of concern for 2017.

The first question asked bankers to rate their farm loan portfolio based on repayment rates. In the first quarter of 2017, 80 percent of all farm loans were current or had no significant repayment problems, up 2 percent from a year earlier. Only 14 percent of farm loans had minor repayment issues – the same percentage as the first quarter of 2016.

The second question asked bankers about the borrowing capacity of their customers. The response was steady compared with a year earlier – one third of customers had borrowed up to their loan limit in the first quarter of 2017. In the first quarter of 2016, 34 percent had borrowed up to the loan limit.

The final special question asked respondents to list their top concern for 2017. Three areas of concern constituted the majority of responses: further declines in farm incomes (62 percent), rising interest rates (14 percent), and unusual weather patterns (14 percent). “No bankers cited declining farmland values as their top concern,” the report concluded.

Read  the latest Agricultural Finance Monitor.

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