Farm bankers cautiously optimistic despite a tough few years

The last several years in agriculture have been weak, largely because crop prices are too low to offset operating costs. Despite that, the outlook for the end of this year was upbeat, according to an October survey of agricultural bankers by the Federal Reserve Bank of Minneapolis. “Upcoming production appears to be strong,” a Minnesota banker commented. “This mixed with a positive commodity price trend is providing optimism.”

By contrast, a North Dakota banker cautioned, “High operating costs and poor crop yields will make this a challenging year.” In farming, location and weather can make a world of difference, and some parts of the region were heavily afflicted by drought this summer.

From July through September, farm incomes fell again across the region compared with a year earlier, the survey found. Spending on capital equipment also fell, though farm household spending rose overall. Interest rates for agricultural loans rose modestly. Nevertheless, demand for loans increased, likely due to tighter incomes. Loan repayments also dropped, alongside an increase in loan renewal and extension activity. Cropland values increased overall from a year earlier across district states, and cash rents also increased. The outlook for the fourth quarter is slightly optimistic, with survey respondents expecting incomes to grow on balance.

Farm income and spending

Bankers agreed that farm incomes decreased over the previous three months. Districtwide, 51 percent of agricultural lenders surveyed said incomes fell in the third quarter compared with the same period in 2025. Despite the net negative result, this marked two successive quarters of improvement (see chart).

Comments from respondents indicated that high operating costs were putting pressure on producer incomes, even in markets with strong prices, like cattle. “Although cattle producers are benefiting from strong livestock prices, rising operating costs continue to pressure overall profitability,” wrote a Montana lender. “As a result, much of the agricultural community remains financially stressed.”

Capital expenditure also dropped, with 54 percent of respondents reporting decreased investment in equipment and buildings from a year ago. By contrast, spending by farm households increased moderately on balance, with 39 percent of respondents reporting an increase from last year, compared with 15 percent who reported decreased spending.

Loan demand and credit conditions

High operating costs are pressuring farm finances. Demand for loans increased from a year earlier for 29 percent of lenders, nearly three times the share who reported lower loan demand. As a result, 34 percent also saw an increase in loan renewals or extensions, while 5 percent reported a decline.

Borrowing increased even as interest rates on farm loans rose. Fixed and variable rates on operating, machinery, and real estate loans all increased modestly in the third quarter. More than a third of lenders said repayment on agricultural loans fell relative to a year ago, while nearly all the rest said repayment was unchanged. A trend of rising collateral requirements reported in recent surveys continued, as 22 percent of respondents reported requiring more collateral on farm loans. No banks reported refusing a loan because of a shortage of funds.

Cash rents and land values

Unlike incomes and balance sheets, farmland values have continued to increase in recent years. This trend continued in the third quarter, though at a more moderate pace. Ninth District nonirrigated cropland values increased by 2.5 percent on average from the third quarter of 2025. Irrigated cropland values grew at nearly the same pace—2.4 percent—while ranch- and pastureland values shot up by 13 percent.

A Minnesota lender explained the resilience of land values: “Land purchases are still very high, generated by older operations with significant cash positions to drive values up.”

Cash rents paid by producers to landowners better reflect the farm income that can be earned on land, and those rents increased as well, though at a slower pace. The district average cash rent for nonirrigated land increased 1 percent from a year ago, while irrigated land rents rose more swiftly at 5.7 percent. Meanwhile, ranchland rents increased more than 6 percent.

Outlook

Perhaps surprisingly, the outlook for agriculture over the remainder of 2026 was somewhat optimistic, as 39 percent of respondents expect that farm incomes will increase in the fourth quarter from the last quarter of 2025, slightly higher than the 32 percent who expect decreased incomes. Lender expectations for farm capital spending remained contractionary, but household spending was expected to grow. Still, given elevated operating costs, half of lenders expect loan demand to increase, and lenders expect the rate of repayment to decrease on balance in the last three months of the year. Still, hardly any anticipate referring any loans to credit agencies.

Optimism aside, the outlook remained uncertain because of the effects of summer drought in many areas and heavier rains going into fall. “More will be known after harvest,” a South Dakota banker said.