Farm Economy Seeks Footing

Expectations of future declines in farm income moderated throughout the District in the third quarter. The share of bankers expecting further declines in income in the fourth quarter was smaller than a year ago in each state (Chart 2). In western Missouri, a region where crop production has been very strong in recent years, the share of bankers expecting lower income next quarter decreased for a third straight year. Bankers in Kansas, Nebraska and Oklahoma also expected the decline in farm income to slow in the months ahead. In Oklahoma, a region that recently has improved alongside relatively strong livestock markets¹, only 25 percent of bankers expected farm income to decline in the coming months. 

Although the pace of decline in farm income has moderated, the prolonged downturn in the District’s farm economy has continued to cut into the working capital of farm borrowers. Nearly 82 percent of bankers reported a year-over-year decline in crop producers’ working capital (Chart 3). Although the deterioration was less severe than in 2016, more bankers reported some deterioration in working capital in 2017 than in both 2014 and 2015. Less than 5 percent of bankers indicated working capital had improved in the third quarter. 

Consistent with recent surveys, farmland values in the western third of the District continued to decrease at a slightly faster pace than in the east. The value of nonirrigated cropland in the western portion of the District decreased 5 percent in the third quarter, whereas values in the eastern portion were unchanged from a year ago (Chart 5). Although the pace of declines in the western portion of the District continued to moderate, the ongoing divergence between the two regions has remained, primarily due to production potential and differences in commodity concentrations.

Changes in farmland values also differed across District states. The value of farmland in western Missouri and Oklahoma generally increased in contrast to other District states (Table). In addition, similar to recent developments in farm income, the pace of declines in farmland values also has softened throughout the District and in most states individually.

Despite the tighter credit conditions, repayment rates for some types of agricultural loans were expected to improve. For example, bankers noted that repayment rates for cattle loans were expected to improve in the next quarter (Chart 7). The expected improvement in repayment rates for cattle loans was attributed to a 4-percent increase in the price of cattle relative to a year ago. Repayment rates among producers of all other agricultural commodities were expected to decline, but at a slower pace than each of the previous three years.

The prolonged downturn in the farm economy and elevated need for loans continued to limit funding availability. In the third quarter, 12 percent of bankers reported a decrease in the funds available for financing and only 5 percent reported an increase. Reflecting ongoing tightening in agricultural credit markets, 12 percent of bankers expected a further decline in funds available for financing in the next quarter.

Bankers also have steadily raised interest rates on agricultural loans as credit conditions have worsened amid the prolonged downturn. In the third quarter, agricultural loans with variable interest rates increased between 26 and 37 basis points from the previous year (Chart 8). Agricultural loans with fixed interest rates increased about 30 basis points from the previous year. General changes in the broader interest rate environment also are likely to have accounted for a portion of the increase in interest rates for agricultural loans.

As credit conditions continued to deteriorate, bankers placed a larger share of loans on their watch and classified lists. In the third quarter, the share of bankers with more than 10 percent of their farm loans on a classified list increased sharply from a year ago (Chart 9). Likewise, the share of bankers with less than 1 percent of farm loans on a watch or classified list declined for a second consecutive year.

Although lenders continued to report increasing financial strain among their agricultural borrowers, bankers indicated that a sharp increase in the sale of farm assets was unlikely. In fact, few bankers reported that they expect more than 10 percent of their farm borrowers to sell mid-to-long-term assets, like machinery or land, by year’s end to improve cash flow or make loan payments (Chart 10). Conversely, more than 80 percent of bankers expected less than 5 percent of their farm borrowers to sell mid-to-long-term assets.