Another strong finish to the year for Ninth District farmers

Inflation was the big economic story of 2022. For agriculture, while rising prices complicated decision-making, they generally broke in producers’ favor, with commodity prices outpacing rising input costs by enough to remain profitable, according to the latest survey of farm bankers by the Federal Reserve Bank of Minneapolis.

Farm incomes overwhelmingly increased in the final three months of 2022, said lenders responding to the Minneapolis Fed’s quarterly agricultural credit conditions survey, conducted in January. The growth in incomes also led to increased loan repayment rates, while loan demand decreased and renewals held steady. Farmland values increased from a year earlier, and cash rents increased as well. The outlook for the beginning of 2023 remained positive, with survey respondents predicting further growth in farm incomes and spending.

Farm income, household spending, and capital investment

Numerous bankers noted the favorable conditions. A South Dakota banker noted gains in net worth and working capital “even though our yields were down. … With higher prices on grain and cattle as well as insurance indemnity payments, our customers are faring well.”

Most of their colleagues around the region agreed, as nearly 3 in 4 respondents reported that farm incomes increased in the fourth quarter of 2023 compared with the same period a year earlier. Only 4 percent said incomes declined (see chart). Two-thirds of lenders said spending by farm households increased in the fourth quarter, with most of the remainder reporting that it was flat.

A slightly smaller share of respondents—45 percent—indicated that capital spending by agricultural producers increased. “We are seeing some caution on the capital purchases. Less machinery and equipment being bought (maybe less new equipment is available),” speculated a Minnesota lender.

Credit conditions

Farmers used higher-than-expected income for a variety of things. Most often they were paying down debt or increasing savings, according to survey responses.

Nearly half of lenders reported that the rate of repayment on agricultural loans increased in the fourth quarter from a year earlier, and the remainder reported that repayment rates were unchanged; no lenders said repayment decreased. Meanwhile, loan renewal activity was steady, according to 69 percent of lenders, while 20 percent said renewal activity decreased.

With incomes up, demand for loans fell from a year earlier for 35 percent of bankers, while 16 percent reported an increase in loan demand. Fixed and variable interest rates on operating, machinery, and real estate loans each increased by more than a whole percentage point from their third-quarter levels, according to respondents. Most lenders reported no change in collateral requirements on loans, though 8 percent said they increased them.

Cash rents and land values

About half of all lenders across the district reported that the volume of land sales increased in their areas in 2022, while 12 percent said the number of sales decreased. “The number of land sales are higher, mainly due to estate sales from non-farming heirs,” wrote a Minnesota lender. A Wisconsin contact said that while recreational land sales to non-farmers increased, “some of it is being rented back to local farmers.”

Cropland values continued to climb in the final three months of 2022, and cash rents also increased. Nonirrigated cropland values increased 18 percent on average across the district compared with a year earlier, while cash rents for that land increased 10 percent. Irrigated farmland values rose 16 percent on average, while ranchland values rose 12 percent.

Outlook

Lenders were cautiously optimistic in their outlook, as 39 percent of ag lenders predicted higher incomes in the first quarter of 2023, while 45 percent expected stable income. “Cash flow projections show a less profitable 2023 plan, but still, lots of cash on hand,” wrote a South Dakota banker.

The outlooks for capital investment and household spending were also positive, with more than a third of respondents anticipating each to increase. Expectations call for increased demand for loans on balance in first-quarter 2023. The outlook for loan repayment was also greater on balance, while renewals and extensions were broadly expected to remain steady.