Farm finances strong heading into growing season

“Good yields, higher prices, and government throwing money at them has farmers in much better financial shape,” said a Wisconsin banker about the state of agriculture in early 2021. Farmers and ranchers in the Ninth District rode a recent trend of improving financial conditions into the beginning of the year, according to the latest survey of agricultural lenders from the Federal Reserve Bank of Minneapolis.

Farm incomes and capital spending increased over the first three months of 2021, according to lenders responding to the Minneapolis Fed’s first-quarter agricultural credit conditions survey, conducted in April. Growing incomes also led to increased loan repayment rates, while loan demand decreased and renewals and extensions held steady. Farmland values increased on average from a year earlier, and cash rents jumped as well. The outlook for the growing season is positive, as respondents expected further growth in farm incomes and spending.

Farm income, household spending, and capital investment

A strong majority of district bankers surveyed (87 percent) reported that farm incomes increased in the first quarter of 2021 compared with the first quarter of 2020. “Huge government subsidy for farmers along with increasing crop prices equals a lot of cash here right now,” wrote a Minnesota lender in a comment. “Farmers are spending again.” More than half of respondents said capital spending by farming operations was up. Household spending was slightly more stable, as 48 percent of lenders reported that it remained flat, compared with 46 percent who reported that it increased.

Loan repayments and renewals

Given improved finances for farmers, the rate of repayment on agricultural loans increased, while renewals held steady. Three of five respondents reported increased loan repayments, while most of the remainder reported that repayment rates were unchanged. Two-thirds of lenders reported no change in the number of loan renewals or extensions, while a quarter said renewal activity decreased.

Demand for loans, required collateral, and interest rates

“Loan demand is down significantly,” commented one Minnesota lender. “Half of producers have no operating loan balance right now and prepaid expenses for 2021,” wrote another. In the survey results, similar numbers of respondents indicated that loan demand decreased or was unchanged—41 percent and 38 percent, respectively—compared with 21 percent who noted increased loan demand. The amount of required collateral saw no change at 99 percent of agricultural banks. Interest rates on farm loans continued to decline. Average fixed and variable interest rates on operating, machinery, and real estate loans each decreased in the first quarter from the end of 2020.

Cash rents and land values

Cropland values and cash rents generally increased in early 2021, continuing a trend from recent surveys. Ninth District nonirrigated cropland values rose by 6.8 percent on average from the first quarter of 2020. Irrigated land values fell slightly, by 1.3 percent on average, while ranchland values were unchanged. The district average cash rent for nonirrigated land jumped by 7.7 percent from a year ago. Rents for irrigated land and ranchland increased 2.6 percent and 5.8 percent, respectively.

Land values climbed the most in Minnesota, where lenders reported that nonirrigated cropland prices rose 10 percent from a year ago. In Wisconsin, by contrast, values for the same class of land were down by nearly 15 percent, while values in North Dakota and South Dakota were more in line with district averages. By contrast, cash rents on nonirrigated land appeared to rise the most in Wisconsin, but were more uniform in the remainder of the district.

Outlook

Expectations heading into the growing season were generally optimistic. Across the district, nearly three-quarters of lenders predicted that farm income will increase in the second quarter of 2021, compared with 4 percent forecasting decreases. The outlook for capital spending is similar, with 69 percent expecting growth, while 57 percent expect farm household spending to rise. Expectations call for modest borrowing in the upcoming quarter, as 71 percent think loan demand will either decrease or hold steady. The outlook for loan repayment was positive on balance, as slightly more than half expect increased repayment rates. Lenders expected renewals and extensions to decrease on balance, and nearly all anticipated no change in collateral requirements.

However, some respondents expressed concerns about recent dry weather in certain regions. “Severe drought conditions are the biggest issue in our area,” said a western North Dakota lender.