Farm income continued to decline across the areas of the Midwest and the Mid-South during the third quarter of 2015 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, the average value of quality farmland continued to weaken, while the value of ranchland and pastureland strengthened.
The survey for the report was conducted from Sept. 15-Sept. 30, 2015. The results were based on the responses of 38 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Mid-South states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Farm Income, Expenditures Continue To Drop
During the third quarter, bankers reported a continued drop in farm income compared with the same period a year ago. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher income compared with the same quarter a year earlier; results lower than 100 indicate lower income), the farm income index value was 61 for the third quarter of 2015. This was the fifth consecutive quarter that this value fell below 100. Looking ahead at the fourth quarter, a large percentage of bankers indicated that they expected income to decline further.
“Due to some concern about the fall harvest and the recent dip in livestock prices, agricultural bankers have a rather dour view of farm income prospects in the fourth quarter of 2015,” the report said, noting a projected fourth quarter index value of 23.
“In the short term, farmers’ income in our area is reliant on crop insurance because many did not plant soybeans due to the wet weather,” a Missouri lender said. “The corn that was planted has a lot of places where it was drowned out. Those who are fortunate enough to have livestock are relying on that income to get through the year.”
Given lower income levels, farmers and ranchers continued to scale back spending, with values for the index for household spending and the index for capital equipment expenditures falling to their lowest levels since the survey began in 2012. Looking ahead, spending in both categories is also expected to decline in the fourth quarter.
“Harvest is progressing quickly in our area, but corn yields are expected to be below average overall. Almost 40 percent of the intended soybean acreage was not planted. Yields of early planted soybeans are expected to be average at best, with yields of later-planted soybeans expected to be below average due to a very dry period during the pod-filling stage,” another Missouri lender said. “The lower projected farm incomes will likely reduce loan demand for capital expenditures for both machinery and farmland.”
Quality Farmland Values Decline; Ranchland and Pastureland Values Rise
During the third quarter of 2015, bankers reported that quality farmland values fell slightly, down 2.6 percent, while the value of ranchland or pastureland rose 4.7 percent, compared with year-ago levels. However, a majority of the bankers surveyed said they expected both quality farmland and ranchland and pastureland prices to decline during the fourth quarter.
Meanwhile, cash rents rebounded modestly in the third quarter after dropping in the second quarter. Quality farmland rents rose 0.7 percent while rents for ranchland or pastureland rose 2.5 percent. For the fourth quarter, bankers expect that cash rents for both quality farmland and pastureland or ranchland will decline.
The first special question was designed to reveal what lenders viewed as the greatest sources of potential short-term risks to the farming and ranching sector. They were asked to rank the following risks from 1 to 5, with 1 indicating the highest probability of occurrence and 5 indicating the lowest probability of occurrence:
• a sharp rebound in petroleum prices,
• a weaker-than-expected fall harvest,
• a sharp fall in livestock (cattle, hogs, and poultry) prices,
• an unexpected increase in interest rates, and
• a larger-than-expected decline in farmland prices.
Most bankers viewed weaker-than-expected fall harvests and a sharp fall in livestock prices as the occurrences with the highest probability of occurring in their areas. Relatively few bankers thought that the three other possible short-term risk scenarios had a high probability of occurrence.
The second special question asked agricultural bankers to assess their views of the prospect for the agricultural sector in their areas over the next 5 to 10 years. Close to 50 percent reported they were optimistic; 36.4 percent reported they were neutral and 15.2 percent said they were pessimistic.
“While I am optimistic toward agriculture, it could be argued that commodities in general are on the down slide as this commodity super cycle winds down. This will mean more pressure on profit margins, especially for grain farmers,” an Illinois banker said. “I am optimistic because I do not think this downturn will be as severe as the 1980s. Many agricultural producers have increased their net worth and follow good business practices, so they could continue for quite some time with tight margins.”