by: Nate Kauffman and Ty Kreitman

Excel SpreadsheetCredit Conditions  | Excel SpreadsheetFixed Interest Rates | Excel SpreadsheetVariable Interest Rates  | Excel SpreadsheetLand Values

Alongside a sharp turnaround in agricultural economic conditions and lasting support from government programs related to pandemic relief, farm income and loan repayment rates both increased from a year ago‑‑at the fastest pace on record. The improvement in farm finances eased credit issues and contributed to softer demand for farm loans. With support from a strong farm economy and historically low interest rates, farm real estate values rose 10% from a year ago, which was the largest increase since 2013.

The outlook for profit opportunities in 2021 remained strong for most agricultural producers as commodity prices remained well above recent years. Conditions in the cattle industry remained somewhat weaker, however, and drought continued to hinder conditions for farmers and ranchers in some areas of the District. Nearly all banks reported that production expenses for both crop and livestock producers increased and cash rental rates in the District also increased, which could pressure margins going forward. Despite potential headwinds, bankers indicated they expected improvement in farm income and credit conditions to continue in the months ahead.

Farm Finances and Credit Conditions

Strong prices for key agricultural commodities brought additional support to farm income in the Tenth District in the second quarter. Alongside multiyear highs in farm commodity prices, about 80% of bankers surveyed in June reported that farm income was higher than the previous year (Chart 1). Bankers’ optimism about farm income was greater than the previous quarter and corresponded with the strongest year-to-year turnaround in farm income since the survey began collecting that information in 2002.

Chart 1: Tenth District Farm Income and Commodity Prices - is a line graph showing the diffusion index* of farm income for the Tenth District and an index of both crop prices** and livestock prices** from 2010 to 2021. The diffusion index is on a 100 scale, with 100 representing no change, values above 100 representing an increase from the same time a year ago and values below 100 representing a decrease from a year ago. The commodity price indices are a 100 scale with Q1 2010 representing 100. *Bankers responded to each item by indicating whether conditions during the current quarter were higher than, lower than or the same as in the year-earlier period. The index numbers are computed by subtracting the percentage of bankers who responded "lower" from the percentage who responded "higher" and adding 100. **Crop Prices - average of individual indices for corn, soybeans and wheat. Livestock Prices - average of individual indices for cattle and hogs. Sources: Wall Street Journal, Haver Analytics and staff calculations.

Farm capital spending also continued to increase with higher incomes. More than half of survey respondents reported capital spending was higher than a year ago among farm borrowers, matching the survey record (Chart 2). The share reporting an increase was slightly higher than the previous quarter in all states except the Mountain States of Colorado, Wyoming and New Mexico, and remained well above the average of recent years.

Chart 2: Share of Banks Reporting Higher Farm Capital Spending – is a clustered column chart showing the percent of respondents in the Tenth District and each state in the District that responded that farm borrower capital spending was higher than a year ago. It includes columns for the 2015-2019 average, Q1 2021 and Q2 2021. * Mountain States include Colorado, northern New Mexico and Wyoming, which are grouped because of limited survey responses from each state.

Production expenses also increased alongside higher commodity prices and increases in spending. A large majority of bankers reported that planned expenses for both crop and livestock producers increased relative to a year ago (Chart 3). Increased costs were slightly more prevalent for crop farmers in nearly all states but, on average, 80% of all lenders indicated that expenses for all producers were at least modestly higher than a year ago.

Chart 3: Change in Production Expenses From Prior Year- includes two individual charts. Left, Crop Producers - is a stacked column chart showing the percent of respondents in the Tenth District and each state in the District that responded that reported that production expenses for crop producers in their area increased significantly and increased modestly. Right, Livestock Producers - is a stacked column chart showing the percent of respondents in the Tenth District and each state in the District that responded that reported that production expenses for livestock producers in their area increased significantly and increased modestly. Note: Bankers responded to the following questions: How have year-to-date and planned production expenses changed for crop producers in your area relative to one year ago? How have year-to-date and planned production expenses changed for livestock and dairy producers in your area relative to one year ago? ** Mountain States include Colorado, northern New Mexico and Wyoming, which are grouped because of limited survey responses from each state.

Despite the rise in expenses, opportunities for profit remained significantly improved from recent years and continued to promote easing of agricultural credit stress. Similar to farm income, loan repayment rates increased from the previous year at the fastest pace on record while renewal and extension activity continued to decline (Chart 4, left). Dropping considerably from recent years, bankers also reported that only 15% of farm loans had repayment problems, including just 5% with major or severe issues (Chart 4, right).

Chart 4: Select Tenth District Credit Conditions and Loan Repayment Problems, includes two individual charts. Left, Credit Conditions - is a line graph showing the diffusion index* of farm loan repayment rates and renewals or extensions in each quarter for the Tenth District from 2010 to 2021. The index is on a 100 scale, with 100 representing no change, values above 100 representing an increase from the same time a year ago and values below 100 representing a decrease from a year ago. Right, Degree of Repayment Problems, Q2 – is a stacked column chart showing the survey average** percent of farm loans in the Tenth District that have minor, major and severe repayment problems. *Bankers responded to each item by indicating whether conditions during the current quarter were higher than, lower than or the same as in the year-earlier period. The index numbers are computed by subtracting the percentage of bankers who responded "lower" from the percentage who responded "higher" and adding 100. **Bankers responded to the following question: Please indicate the percentage of the dollar amount of your bank's farm loan portfolio that currently falls within each of the following repayment classifications (None, minor, major or severe).

Alongside better prospects for farm finances, demand for farm loans continued to soften and bank liquidity remained ample. Throughout the District, farm loan demand declined at a quicker rate than the previous quarter while the availability of funds increased at a faster pace (Chart 5). With lower demand for agricultural lending, deposits also increased from a year ago at most banks.

Chart 5: Tenth District Farm Loan Demand and Bank Liquidity– includes two individual charts. Left, Loan Demand and Fund Availability- is a line graph showing the diffusion index* of farm loan demand and fund availability in each quarter for the Tenth District from 2010 to 2021. The index is on a 100 scale, with 100 representing no change, values above 100 representing an increase from the same time a year ago and values below 100 representing a decrease from a year ago. Right, Bank Deposits, Q2 – is a bar chart showing the change in deposit balances for all respondents in the Tenth District as a diffusion index* in 2018, 2019, 2020 and 2021. *Bankers responded to each item by indicating whether conditions during the current quarter were higher than, lower than or the same as in the year-earlier period. The index numbers are computed by subtracting the percentage of bankers who responded "lower" from the percentage who responded "higher" and adding 100.

Interest Rates and Bank Financial Performance

In addition to improved income and credit conditions, interest rates on farm loans declined further. Throughout the District, both fixed and variable rates on all loan types decreased slightly from the previous quarter and reached all-time lows (Chart 6). In contrast to recent increases in costs of some inputs, low interest rates have limited interest expenses for many producers.

Chart 6: Average Interest Rates On Farm Loans– includes two individual charts. Left, Fixed - is a line graph showing the average fixed interest rate for operating, intermediate and real estate loans in the Tenth District in each quarter from 2015 to 2021. Left, Variable - is a line graph showing the average variable interest rate for operating, intermediate and real estate loans in the Tenth District in each quarter from 2015 to 2021.

The slight decline in interest rates over the quarter was consistent across nearly all states in the District. The average fixed and variable rate on both farm real estate and operating loans was slightly less than the previous quarter in all states except Nebraska (Chart 7). The average rate for both types of loans also remained at least 80 basis points less than the average from 2015 to 2019 in all states.

Chart 7: rage Fixed and Variable Interest Rates– includes two individual charts. Left, Farm Real Estate- is a clustered column showing the average fixed and variable interest rate for farm real estate loans in the Tenth District and each state. It includes columns for the 2015-2019 average, Q1 2021 and Q2 2021. Left, Farm Operating Loans- is a clustered column showing the average fixed and variable interest rate for farm real operating loans in the Tenth District and each state. It includes columns for the 2015-2019 average, Q1 2021 and Q2 2021. *Mountain States include Colorado, northern New Mexico and Wyoming, which are grouped because of limited survey responses from each state.

The combination of low demand for farm loans and historically low interest rates has contributed to compressed interest margins for many agricultural lenders, but several factors have provided support to banks’ financial performance. Returns for External Linkcommercial agricultural banks improved markedly from the end of 2020, and the most common source of support cited by respondents was the Small Business Administration Paycheck Protection Program (PPP) (Chart 8). Stronger financial conditions for borrowers, demand for non-agricultural loans and improved liquidity were the next most common sources of support.

Chart 8: Factors Providing Support to Bank Financial Performance - is a bar chart showing the percent of survey respondents that selected the following factors as sources of support for bank financial performance: Government Lending Programs (PPP), Borrower Financial Conditions, Demand for Non-Agricultural Loans, Excess Liquidity, Demand for Agricultural Loans, Bank Strategies Related to Non-Interest Income and other. Note: Bankers responded to the following questions by selecting all that apply: Which of the following have provided the most support to the financial performance of your bank in the past 12 months (i.e. net income and return on assets)?

Farmland Values and Cash Rents

Historically low interest rates and strength in the agricultural economy continued to support farm real estate values. The value of all types of land throughout the District were about 10% higher than a year ago, the largest increase since 2013 (Chart 9). As of the second quarter, nonirrigated farmland values were about 14% higher than the beginning of 2019, offsetting the decline of about 12% from 2014 to 2018.

Chart 9: Farm Real Estate Values in the Tenth District – is a line graph showing the percent change* in farm real estate values from the previous year for non-irrigated cropland, irrigated cropland and ranchland in each quarter from 2010 to 2021. * Percent changes are calculated using responses only from those banks reporting in both the past and the current quarters

Cash rents on all types of land also increased, but at a slightly slower pace than farmland values. Cash rents on nonirrigated and irrigated cropland rose about 7% from last year, while rents for ranchland increased slightly less than 1% (Chart 10). Similar to land values, the increase in cash rents for non-irrigated and irrigated farmland was the largest since 2013.

Chart 10: Farmland Cash Rents in the Tenth District, First Quarter 2021– is a line graph showing the percent change* in cash rents on farmland from the previous year for non-irrigated cropland, irrigated cropland and ranchland in each quarter from 2010 to 2021. * Percent changes are calculated using responses only from those banks reporting in both the past and the current quarters

Increases in nonirrigated farmland values outpaced increases in cash rents in most states and bankers expected a similar trend in coming months. The annual percent change in the value of nonirrigated land was slightly higher than the change in cash rents in nearly all states (Chart 11). Similarly, a smaller share of banks indicated they expected increases in cash rents than land values in the next three months in most states.

Chart 11: Nonirrigated Farmland Values and Cash Rents– includes two individual charts. Left, Value of Nonirrigated Farmland, Q2 2021- is a clustered column showing the percent change* in the value of nonirrigated cropland and cash rents on nonirrigated crop in the Tenth District and each state. Left, Banks Expecting Higher Values and Cash Rents in Next Three Months, Q2 2021- is a clustered column showing the share of respondents reported an expectation of higher nonirrigated cropland values and cash rents in the next three months compared to the same time a year ago in the Tenth District and each state. * Percent changes are calculated using responses only from those banks reporting in both the past and the current quarters **Mountain States include Colorado, northern New Mexico and Wyoming, which are grouped because of limited survey responses from each state.

Banker Comments from the Tenth District

“The drought was a big concern early in the summer.” – Southeast Colorado

“Input costs are increasing substantially and producers are seeing shortage of parts and supplies due to supply chain issues.”– Northeast Colorado

“This region will experience a tough year in agriculture due to drought conditions.”– Northern Wyoming

“PPP loans greatly enhanced farm cash flows for the past six months. Grain prices as they currently sit, will enhance farm cash flows for the remainder of 2021.”– Northern Oklahoma

“The increase in land values is making it difficult for both crop and livestock producers to afford purchasing based on the amount of return they generate from production.”– Northeast Oklahoma

“Supply constraints have pushed input expenses higher and the limited availability of equipment will slow capital spending.”– East Kansas

“Commodity prices are at profitable levels for producers and credit lines are not as far advanced as projected due to covid relief and PPP loan proceeds.”– Southwest Kansas

“Stimulus funding added to overall liquidity and greatly reduced loan demand.”– Central Missouri

“I’ve heard anecdotes of much higher cash rents being paid by specialty crop producers on some tracts of farmland in the area.”– Northwest Missouri

“PPP related fees constitute about a third of total revenue for the bank so far this year.”– Northcentral Nebraska

“Along with the rally in grain prices the first 6 months of 2021, we're seeing continued increases in crop inputs. Those that locked in 2021 inputs early will be okay in 2021, but 2022 might be a totally different story, regardless of high crop prices.”– Northeast Nebraska

A total of 154 banks responded to the Second Quarter Survey of Agricultural Credit Conditions in the Tenth Federal Reserve District—an area that includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri. Please refer questions to Nathan Kauffman, economist or Ty Kreitman, assistant economist at 1-800-333-1040.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. 

Authors

Nate Kauffman

Senior Vice President, Economist, and Omaha Branch Executive

Nate Kauffman is Senior Vice President and Omaha Branch Executive at the Federal Reserve Bank of Kansas City. In his role as the Kansas City Fed's lead economist and represe…

Ty Kreitman

Associate Economist

Ty Kreitman is an associate economist in the Regional Affairs Department at the Omaha Branch of the Federal Reserve Bank of Kansas City. In this role, he primarily supports the F…