Farm incomes strong, land values soar heading into planting season

“Farmland prices are off like a rocket,” noted a Minnesota banker. Their experience was typical of rural areas across the Ninth District, according to results of the latest survey of agricultural lenders by the Federal Reserve Bank of Minneapolis. Farmers and ranchers in the region also cashed in on higher commodity prices, leading to improved financial conditions in the beginning of the year.

Farm incomes and capital spending increased over the opening three months of 2022, according to lenders responding to the quarterly agricultural credit conditions survey, conducted in April. Growing incomes also led to increased loan repayment rates, while loan demand decreased, and renewals and extensions also edged lower on balance. Farmland values surged, increasing sharply on average from a year earlier across the district, and cash rents jumped as well. The outlook for the growing season was bullish, 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 2022 compared with the first quarter of 2021. That income growth was primarily driven by strong commodity prices: “A lot of liquidity in the market right now,” wrote a North Dakota lender in a summary comment. More than two-thirds of respondents said capital spending by farming operations was up. Household spending increased similarly, as reported by 70 percent of lenders.

Loan repayments and renewals

“It has been a very easy renewal season due to the higher grain and livestock prices,” commented a South Dakota banker. While 61 percent of lenders reported no change in the number of loan renewals or extensions, 28 percent said renewal activity decreased. The rate of repayment on agricultural loans increased, according to 70 percent of respondents. Most of the remainder reported that repayment rates were unchanged.

Demand for loans, required collateral, and interest rates

Given improved income for farmers, loan demand fell. Half of bankers in the survey reported a lower loan demand in the first quarter relative to the same period last year, compared with 22 percent who noted increased loan demand. A majority of agricultural banks (96 percent) saw no change in the amount of required collateral. Interest rates on farm loans increased, following the broader trend. Average fixed and variable rates on machinery and real estate loans each decreased in the first quarter by at least 10 basis points or more from year-end 2021. Interest rates also increased for operating loans, but by a smaller amount.

Cash rents and land values

Coming on the heels of fast growth in the previous survey, cropland values surged in the opening months of 2022, with cash rents following. Ninth District nonirrigated cropland values rose by 23 percent on average from the first quarter of 2021. Irrigated land values grew by 26 percent over the same period, while ranchland values rose 18 percent. The district average cash rent for nonirrigated land jumped by 17 percent from a year ago. Rents for irrigated land and ranchland increased 16 percent and 17 percent, respectively.

Increases in land values were generally consistent and similar across district states, with the exception of Montana, where nonirrigated land values increased at a much faster pace, according to a relatively small sample of lenders there. Changes in cash rents varied slightly more, but rents increased across the district.

Outlook

Expectations heading into the growing season were generally optimistic. Across the district, 70 percent of lenders predicted that farm income will increase in the second quarter of 2022, compared with 7 percent forecasting decreases. The outlook for capital spending is also positive, with half of respondents expecting growth, and 59 percent expecting farm household spending to rise. Expectations call for steady borrowing in the upcoming quarter—39 percent think loan demand will increase, compared with 35 percent who think it will fall. The outlook for loan repayment was positive on balance, as half of the bankers expect increased repayment rates. Survey respondents generally expected renewals and extensions to decrease on balance, and nearly all anticipated no change in collateral requirements.

The primary concerns shared by bankers involved drought and inflation. Multiple respondents from North Dakota, which experienced severe drought in 2021, noted that soil conditions remained dry there. Meanwhile, numerous comments from across the region noted that input cost increases were a concern going forward.

“Rising crop inputs, rising interest rates are greatly increasing the cost of production of commodities,” wrote a Minnesota farm lender. “At current commodity price levels, cashflows still work well. However, when markets return to historic averages, cashflow will become difficult.”