Agricultural Credit Conditions Survey
District farmers still struggling heading into planting season
First-quarter 2019 agricultural credit conditions survey
Published May 29, 2019 | May 2019 issue
Persistently low crop prices and tight margins have continued to put financial pressure on farmers at the beginning of the growing year, according to results of the Federal Reserve Bank of Minneapolis’ first-quarter (April) agricultural credit conditions survey.
Farm incomes and capital spending decreased, according to lenders responding to the survey. Tighter cash flows reduced the rate of loan repayments, while renewals and extensions increased slightly, as did loan demand. Meanwhile, cropland values and rents decreased slightly across the Ninth District. The outlook for the second quarter of 2019 was downbeat, with survey respondents predicting further decreases in incomes, capital expenditures, and household spending.
Farm income, household spending, and capital investment
“Low commodity pricing continues to hamper earnings,” reported a South Dakota lender. Survey results reflected this comment, as 68 percent of district lenders surveyed reported that farm incomes decreased in the first quarter of 2019 compared with the first quarter of 2018. Two-thirds of respondents said capital spending by farming operations was down. By comparison, household spending was more stable, as slightly more than half of lenders reported that it remained flat, while 41 percent reported it fell.
Minnesota experienced the most widespread decrease in income in the district, as 79 percent of lenders in the state reported decreased farm income, while 92 percent indicated that capital spending fell. Lenders in Montana were the least negative, with 42 percent of those surveyed in the state reporting falling incomes in the quarter and the balance reporting flat income. Montana respondents also reported household and capital spending decreases least frequently in the district.
Loan repayments and renewals
Given the tight finances for farmers, the rate of repayment on agricultural loans dropped, while renewals increased. Loan repayments decreased for 35 percent of respondents, while 62 percent reported that repayment rates were unchanged. A smaller percentage of lenders stated that the renewal activity held steady, at 51 percent, but 48 percent reported a greater number of renewals. Minnesota saw the lowest rate of repayment, with 43 percent of lenders reporting that it decreased.
Demand for loans, required collateral, and interest rates
Demand for loans rose slightly, driven by falling incomes. About 41 percent of lenders surveyed reported an increase in loan demand, while 47 percent experienced no change. The amount of required collateral increased slightly on balance, but 82 percent of respondents reported no change. Interest rates increased overall, with fixed and variable rates on operating, machinery, and real estate loans all increasing from their levels in the previous quarter by 10 to 20 basis points.
Cash rents and land values
In keeping with the trend over recent years, land values slightly retreated further, though they remain strong relative to historical levels. The average value for nonirrigated cropland in the district fell by almost 1.5 percent from the first quarter of 2018; irrigated land values increased slightly more than 1 percent, while ranchland values fell by slightly less than 1 percent. The district average cash rent for nonirrigated land decreased by more 2 percent from a year ago. Rents for irrigated land also fell slightly, while ranchland rents were unchanged.
Land values fell the most in South Dakota, where nonirrigated cropland prices dropped 4 percent compared with a year earlier, according to survey respondents. Irrigated South Dakota cropland prices fell 2 percent, and ranchland values fell almost 7 percent, while rents there fell by double digits for all three classes of land. While cropland prices declined on average across the district, nonirrrigated land prices were unchanged in North Dakota and Montana. Cash rents on nonirrigated land were also flat in Montana, but increased slightly in North Dakota.
Expectations heading into the growing season were generally pessimistic. Across the district, 59 percent of lenders predicted that farm income will decrease in the second quarter of 2019, compared with fewer than 2 percent forecasting increases. The outlook for capital spending is similar, with 57 percent expecting decreases, while 36 percent expect farm household spending to fall. Expectations call for increased loan demand in the upcoming quarter, according to 30 percent of respondents, compared with 60 percent who see no change. The outlook for repayment rates was lower, while respondents expect renewals and collateral requirements to increase on average.
The weak outlook is largely driven by expectations for crop prices. “Commodity prices seem to be stuck due to high supply and global competition,” a Montana banker commented. “2019 seems like it will be more of the same.”