Despite generally good harvests, farm incomes declined

During the fall, harvests are typically the biggest concern on farmers’ minds. But even in parts of the Ninth District where crops look bountiful, crop prices that have been falling for the last two years were a bigger worry this year, according to an October survey of agricultural bankers by the Federal Reserve Bank of Minneapolis.

“Above average yields may somewhat offset the lower commodity prices,” commented a South Dakota banker. The resulting financial stress on many operations “will most likely be more noticeable this year.”

Farm incomes across the region overwhelmingly fell, according to the survey, which asked about conditions from July through September. Spending on capital equipment also fell, though farm household purchases increased on balance. Tighter income pushed up demand for loans, while the rate of loan repayment dropped, and loan renewal and extension activity increased. Interest rates for agricultural loans dipped slightly. Land values and cash rents increased from a year earlier across district states. The outlook for the fourth quarter was pessimistic, with survey respondents expecting a further decrease in incomes.

Farm income, household spending, and capital investment

Bankers were nearly unified in their assessment that farm incomes were down. Districtwide, 85 percent of agricultural lenders surveyed said incomes decreased in the third quarter from a year earlier, compared with the previous quarter’s 76 percent (see chart). Capital expenditures also dropped, with 67 percent of respondents reporting decreased investment in equipment and buildings from a year ago, compared with 11 percent reporting increased spending.

“Capital spending is down significantly, with most farmers not purchasing or trading machinery at this time,” reported a banker in South Dakota. By contrast, spending by farm households increased slightly on balance, though nearly half of respondents reported no change.

Loan demand and credit conditions

Ongoing weakness in income has begun to take a toll on farm financial conditions. Demand for loans increased on balance, in keeping with a trend over the past several quarters, according to lenders. Nearly half said loan demand increased from last year, compared with 20 percent who said it was lower. While two-thirds of banks said there was no change to loan renewals or extensions, the remainder said that renewal activity increased.

Farm borrowers received a bit of relief with falling interest rates. Fixed and variable rates on operating, machinery, and real estate loans all decreased from their highs in the previous quarter. Most lenders (61 percent) indicated that the rate of repayment on agricultural loans held steady relative to a year ago, and 37 percent said repayment was down. Collateral requirements on loans increased according to 19 percent of lenders surveyed, while the remainder reported that they were unchanged. Only 2 percent of banks reported having refused a loan due to a shortage of funds.

Cash rents and land values

The trend of rising farmland values and cash rents over the last four years continued in the third quarter but at a more modest pace. Ninth District nonirrigated cropland values increased by 2 percent from the third quarter of 2023. Irrigated cropland values rose by more than 3 percent from a year earlier, while ranch- and pastureland values increased a little more than 1 percent. The district average cash rent for nonirrigated land jumped by 5 percent from a year ago. Ranchland rents also increased 5 percent, while cash rents for irrigated land fell by almost 2 percent.

Changes in land values and rents were somewhat mixed across the region. Nonirrigated land values increased in most states but dropped more than 2 percent in Minnesota. “Have started to hear some rumblings of no sales on farmland as sellers still want big dollars,” a lender there commented.

Outlook

The outlook for agriculture over the remainder of 2024 was mostly pessimistic, as 83 percent expected that farm incomes will decrease in the fourth quarter, compared with 6 percent who expected increased incomes. The outlook for farm capital spending was also contractionary, and household spending was expected to flatten. More than 60 percent of lenders expected loan demand to increase, likely because of tighter incomes of agricultural producers rather than the slight decline in interest rates, which remain much higher than their levels two years ago. While more than half of respondents expected the rate of repayment to decrease further in the last three months of the year, most said they don’t anticipate referring any loans to credit agencies.

Looking further into next year, a Minnesota lender was not optimistic. “Inputs and rents remain high. 2025 cash flows will be very tight and most likely net losses.”