After a solid first quarter, the agricultural sector was battered by delayed planting and higher input costs. According to the Minneapolis Fed’s second-quarter 2008 (July) agricultural credit conditions survey, great selling prices are keeping agriculture strong, but not as robust as reported in the first quarter’s survey.
Farm income and household and capital spending continued to expand at a solid pace. Respondents’ optimism fades somewhat as they look to the future. “Grain farmers will be profitable due to current crop values. However, input costs continue to be more expensive. If there is a correction [lower] in crop prices, positive cash flows may be hard to find in 2010,” a South Dakota lender said.
Farm income, household spending and capital investment
Profits continue with a vast majority, 77 percent, of respondents reporting higher-than-normal income for the second quarter. However, this is down from 90 percent of the respondents in the first quarter survey. “Crop input costs have increased significantly,” said a South Dakota respondent. In Minnesota, 95 percent reported increased earnings, while in Montana, almost all reported no change in income.
Profits poured into household consumption and capital equipment spending. Over 60 percent of the respondents reported higher capital spending in the second quarter, and 67 percent reported increased household spending.
Loan repayments and renewals
Profits were also used to pay down loans and reduce the need to renew or extend loans. Thirty-six percent of all survey respondents reported increased loan repayments, and only 2 percent reported decreased loan repayments. As the number of producers facing liquidity issues decreased, 17 percent of the lenders surveyed also noted decreases in loan renewals/extensions. Only 5 percent reported increases.
Demand for loans, required collateral and interest rates
In light of higher profit opportunities and lower interest rates, farmers are demanding more loans. About 38 percent of respondents reported an increased demand for loans, while 23 percent reported a decrease. Only 9 percent of the lenders reported increased collateral requirements, and very few loans were refused because of a shortage of funds. Both fixed and variable interest rates on operating loans dropped about 30 basis points from the first quarter, while variable interest rates dropped for machinery and rates for real estate loans dropped about 20 basis points.
Cash rents and land values
As operator profits escalate, landowners want more for their land. “We hear talk of cash rent prices for ’09 at $200 to $300 per acre,” a Minnesota lender said. However, average Minnesota cash rents for nonirrigated farmland are currently $186 per acre. In Montana, cash rents are $32 per acre. Cash rents influence land prices. Survey results show that average nonirrigated farmland and ranchland prices increased 22 percent and 15 percent, respectively, from a year ago. The fastest growth rates in nonirrigated farmland and ranchland prices were in North Dakota. (Not only can prices vary from state to state, they can also vary from parcel to parcel. For more detailed information on agricultural prices, see the Minnesota Land Economics Web site.
The outlook of financial conditions for the third quarter of 2008 is not as robust. Sixty-eight percent of lenders expect above-average third-quarter income. Respondents expect this year’s corn and soybean harvests to come in lower than last year. In addition, many respondents see ethanol producers restraining production because of to high corn prices. “An ethanol plant in our area is in early construction and won’t come online until late ’09 or early 2010. Hopefully, pricing problems will be resolved by that date,” a respondent from Minnesota said.
Appendices: State Fact Sheet | State Fact Sheet-Outlook