Farm Finance Update March 17, 2017 Nate Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System
Regional Federal Reserve Banks are important to the structure of U.S. monetary policy.
Commercial banks connected to agriculture are concentrated in the region. Agricultural Banks in the U.S. Source: Federal Reserve Board of Governors.
Outlook Themes The downturn in agriculture is in a 4 th consecutive year. Strong production last year improved cash flow for many producers, but prices remain low and challenges in the livestock sector remain. Most measures of farm finances continue to weaken, but gradually.
Per capita incomes are still rising, but have slowed in the central U.S., a commodity-dependent region. Per Capita Personal Income Change from 2008 to 2014 Change from 2014 to 2016 Source: BEA.
Commodity prices, not just in agriculture, have fallen sharply since 2013. Change in Commodity Prices since 2013 10 % change from 2013 to Mar. 17* 10 % change from 2013 to Mar. 17* 0 0-10 -10-20 -20-30 -30-40 -40-50 -50-60 -60 * Through 3/13/2017 Sources: The Wall Street Journal and Haver Analytics.
Last year s crop production boosted cash flow for some producers, but has weighed on prices. Crop Yields: Deviation from Trend 30 Percent Percent 30 20 20 10 10 0 0-10 -20-30 -40 Corn Soybeans Wheat Total Deviation 2000 2002 2004 2006 2008 2010 2012 2014 2016-10 -20-30 -40 Source: USDA and staff calculations.
Multiple years of record production, and the drop in commodity prices, have cut farm income. Net Farm Income and Production 160 140 120 100 80 60 40 20 Billion Dollars, (2016 $) Record Global or U.S. Production U.S. Farm Income (Left Scale) U.S. Corn Price (Right Scale) $/bu 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 8 7 6 5 4 3 2 1 0 Note: The shaded areas represent years when either U.S. or global production of corn, soybeans and wheat set a new record. Sources: USDA.
Reduced income has spurred demand for financing, and loan repayment rates have softened. Agricultural Credit Conditions KC Fed District 160 Diffusion Index Diffusion Index 160 140 Expected in three months 140 120 120 100 100 80 Farm Loan Demand 60 Loan Repayment Rates Loan Renewals or Extensions 40 Expected in three months 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 80 60 40 Source: Federal Reserve Bank of Kansas City.
Tightening financial conditions have strained working capital positions. Crop Producers Working Capital KC Fed District: Change from Previous Year Current Ratio 100 80 60 Percent of respondents Significant deterioration Modest deterioration No change Improvement 4.0 3.5 3.0 Ratio Kansas U.S. 40 2.5 2.0 20 1.5 0 2014 2015 2016 1.0 2012 2013 2014 2015 2016* 2017* * 2016 Estimate and 2017 Forecast. Sources: Federal Reserve Bank of Kansas City, Kansas State University, and USDA.
Interest rates have edged up, particularly for variable rate loans. Variable Interest Rates Fixed Interest Rates 5.75 Percent 2012 6.25 Percent 2012 5.50 5.25 2013 2014 2015 2016 6.00 5.75 2013 2014 2015 2016 5.00 5.50 4.75 Operating Loans Machinery Loans Farm Real Estate Loans 5.25 Operating Loans Machinery Loans Farm Real Estate Loans Source: Federal Reserve Bank of Kansas City.
Farmland values have continued to decline from their peaks in 2013-2014, but gradually. High Quality Farmland Values 2016:Q4 Percent change from previous year Change in U.S. Farmland Values, Peak to 2016:Q4 State Peak Quarter Percent Change from Peak Mountain States* 2016:Q2-27 Kansas 2013:Q4-21 Minnesota 2013:Q1-21 N. Dakota 2015:Q3-19 S. Dakota 2014:Q3-17 Iowa 2013:Q2-17 Nebraska 2013:Q3-11 N. Illinois 2014:Q2-10 Missouri 2013:Q3-9 N. Indiana 2013:Q4-9 S. Wisconsin 2015:Q1-9 Texas 2016:Q4 No Decline Oklahoma 2016:Q4 No Decline Source: Federal Reserve Bank of Kansas City.
Farm loan delinquency rates have edged up, but only slightly. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Past Due and Non-Accruing Farm Loans at Commercial Banks Percent, seasonally adjusted* Percent, seasonally adjusted* Past Due 30-89 Days Past Due 90+ Days Nonaccruing Total Nonperforming** 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * Percent of all outstanding non-real estate farm production loans at commercial banks. ** Total nonperforming loans includes the share of all past due, nonaccruing and net charge-off loans. Source: Federal Reserve Bank of Kansas City. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
However, farmland values are still expected to trend lower. Expected Change in Nonirrigated Cropland Values 50 45 40 35 30 25 20 15 10 5 0 Percent change expected over next 12 months Avg. = -6.7 Avg. = -5.7 Avg. = -4.4 2014 2015 2016 > 20% Decline 11-20% Decline 6-10% Decline 1-5% Decline No Change 1-5% Increase 6-10% Increase 11-20% Increase Source: Federal Reserve Bank of Kansas City.
Interest rates have been projected to rise gradually. U.S. Interest Rates 7 Percent Percent 7 6 5 4 3 2 1 Fed Funds Rate 30-Year Treasury 6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: Federal Reserve Bank Board of Governors and Haver Analytics. 0
If debt continues to grow and land values continue to fall, significant problems may still arise, but slowly. 25 Farm Sector Debt-to-Asset Ratio Percent Number of Years to Reach Debt-to-Asset Ratio of 20% Annual Change in Farm Debt 20 15 10 Annual Change in Farmland Values 0% 2% 4% 6% 8% 10% 0% -- 18.2 9.2 6.2 4.7 3.8-2% 21.9 9.9 6.5 4.8 3.9 3.2-4% 11.0 6.8 5.0 3.9 3.3 2.8-6% 7.3 5.1 4.0 3.3 2.8 2.5-8% 5.4 4.1 3.4 2.9 2.5 2.2-10% 4.3 3.4 2.9 2.5 2.2 2.0 Source: USDA and author s calculations.
450 400 350 300 250 200 150 100 Ag and rural consolidation is a potential implication of a prolonged downturn. Number of Farms by Economic Class Index, 2000 = 100 Index, 2000 = 100 450 120 More than $1m Northern Plains $500k to $1m 400 115 Southern Plains $250k to $500k 350 110 Heartland $100k to $250k 300 Less than $100k 105 250 100 200 95 150 100 90 Total Number of Farms 120 115 110 105 100 95 90 50 2000 2005 2010 2015 50 85 2000 2005 2010 2015 85 Source: USDA. Source: USDA.
Concluding Remarks Farm finances remain a concern and economic risk for the region. The recent downturn in the rural/ag economy would have been more severe if farmland values dropped more significantly. Although the outlook for ag is not a crisis, there is potential for further consolidation.
Questions? Nate Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City Email: nathan.kauffman@kc.frb.org Website: http://www.kansascityfed.org/omaha/