U.S. grain farmers are boosting demand for loans from farm banks as five-year lows in crop prices squeeze operating budgets ahead of spring planting, according to a national survey of farm bankers issued by the Federal Reserve Bank of Kansas City on Wednesday.
"Reduced profits in the crop sector persisted in the fourth quarter of 2014, leading to a sharp rise in farm-sector borrowing and a slight decline in cropland values," the bank said. "Should low crop prices and high input costs persist, crop sector profit margins may weaken further and strain loan repayment capacity in the coming year."
Corn prices set record highs during the summer of 2012 amid the biofuels boom and drought in the United States and many overseas areas. But prices are now down by about half after two consecutive record American harvests. At the same time, crop production has recovered overseas, hurting wheat exports. Without mammoth Chinese demand, soybean prices would be even lower.
The Fed survey, which covered the Midwest, Plains and Mountain states, said farm loan debt outstanding as of Sept. 30 was 6.7 percent higher than a year earlier. Loan-to-deposit ratios at farm banks have risen to the highest since 2010. Sales of combines and large tractors were 26 percent lower in 2014 than the year before. Collateral requirements showed "a slight rise," the Fed said.
Livestock producers, aided by the sharp drop in feed costs, continued to regain profits in 2014, the Fed said. But lending to livestock producers also "rose significantly" last year as cow-calf operators expanded to rebuild beef herds. "Looking ahead, the supply of feeder cattle may contract further if a reduction in calf slaughter signals that more animals are being retained to rebuild herds," the Fed said.
Pressure on farm land values from lower crop revenues had been countered to some extent by demand for grazing land from resurgent livestock farmers.
"While the majority of survey respondents expected crop land values would stabilize, some anticipated additional declines in 2015," the Fed said.