Full text of Agricultural Finance Monitor : 2014 Fourth Quarter

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Agricultural FINANCE Monitor
agricultural credit conditions in the Eighth Federal Reserve District
2014 ■ Fourth Quarter

The eleventh quarterly survey of agricultural credit
conditions was conducted by the Federal Reserve Bank of
St. Louis from December 15, 2014, through December 31,
2014. The results presented here are based on the responses
from 39 agricultural banks within the boundaries of the
Eighth Federal Reserve District.1 The Eighth District
includes all or parts of seven Midwest and Mid-South
states. These data are not adjusted for any seasonal patterns
(should they exist). Accordingly, users are cautioned to
interpret the results carefully. Users are also cautioned
against drawing firm conclusions about longer-run trends
in farmland values and agricultural lending conditions.2
We have made an important change in the reporting of
survey results. Beginning with this quarter’s survey, we are
now placing more emphasis on the results from the same
respondents for two comparable periods. (These respondents will be described here as “common respondents.”)
This change largely reflects a reduction in the number of
respondents over time. The entrance or exit of an individual
respondent may potentially generate an outsized effect on
aggregate values—especially for land values and cash rents.
To minimize this potential problem, we will no longer
report dollar values for farmland and cash rents. Instead,
consistent with other Federal Reserve surveys, we will report
year-to-year percentage changes. This change will better
illustrate longer-term trends. For most reporting measures,
this will diminish the sample size. However, given the relatively diverse nature of agribusiness across the Eighth
District, we believe this change will sharpen the accuracy
of survey results.

Executive Summary
According to the survey responses from 39 agricultural
banks in the Eighth District, farm income, farm household
spending, and capital equipment expenditures all declined in
the fourth quarter relative to the same period a year earlier.

Selected Quotes from Banker Respondents
Across the Eighth Federal Reserve District
“The concentration that has taken place in farming and the aging
of the farm population should be causing some concern as to the
concentration of debt. Some aggressive, especially young farmers
and sometimes multiple-family operations have taken on large debt
loads. This could become a problem if agricultural profitability
reverts to more historical returns.” (Illinois)
“The uncertainty of tax laws is affecting equipment purchases at the
end of the year.” (Illinois)
“Lower commodity prices have reduced margins for 2014 and created
frequent carryovers. Restoring trade relations to Cuba would give an
immediate, positive affect to our local ag economy.” (Arkansas)
“Our farmers are mostly cattle and integrated livestock and poultry
producers. Cow/calf producers are seeing good profits, stocker operations margins are about the same as before price spike, it takes
more capital to run the same numbers. All in all our producers have
had a good year.” (Arkansas)
“It is very difficult for farmers to buy farmland and new equipment
with corn prices in the $3.50 range. Many received much less for
their crops this fall. Farmers with a lot of debt cannot postpone the
sale of their crop waiting for prices to rebound when they have payments due after harvest.” (Missouri)
“Extremely high yields and high cattle prices have helped offset the
reduction in crop prices.” (Missouri)
“Cash rents are typically renegotiated from now until March. With
lower grain prices, expectations are for rents to begin adjusting
downward. Excellent yields have helped offset lower grain prices for
most producers for the 2014 crop, but future incomes are expected
to be reduced based on average yields and projected prices for the
2015 crop year. Higher livestock incomes have also offset lower
grain prices for those with cattle and/or hogs.” (Missouri)
NOTE: These are generally verbatim quotes, but some were lightly edited
to improve readability.

The survey is produced by staff at the Federal Reserve Bank of St. Louis: Gary Corner, Senior Examiner, Bank Supervision and Regulation
Division; and Lowell R. Ricketts, Senior Research Associate, and Kevin L. Kliesen, Business Economist and Research Officer, Research
Division. We thank staff at the Federal Reserve Bank of Kansas City for initial and ongoing assistance with the agricultural credit survey.
If you have comments or questions, please contact Kevin Kliesen at kevin.l.kliesen@stls.frb.org.
The Eighth Federal Reserve District is headquartered in St. Louis and includes branch offices in Little Rock, Louisville, and Memphis;
the District includes the state of Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee.

Agricultural FINANCE Monitor

Federal Reserve Bank of St. Louis 2

In the survey, bankers were asked two types of questions: (i) estimates of current dollar values and interest rates and (ii) expectations for
future values. Dollar values and rates refer to the fourth quarter of 2014. Regarding expectations for future values, bankers were asked
whether they expect values to increase, decrease, or remain constant (either relative to a year ago or relative to current values; see table
descriptions). A “diffusion index” value was then created for “income and expenditures” and for the 3-month trends in “land values” and “cash
rents” (per acre). The diffusion index was created by subtracting the percent of bankers that responded “decrease” from the percent that
responded “increase” and then adding 100. Index values from 0 to 99 indicate overall expectations of decreasing values; index values from
101 to 200 indicate overall expectations of increasing values; and an index value of 100 indicates an even split.
The results reported in these tables refer to the entire Eighth Federal Reserve District.

Table 1

Table 2

Income and Expenditures (versus year-ago levels)

Land Values and Cash Rents (year/year change)

Index value
Farm income
2014:Q4 (actual)
2015:Q1 (expected)

78
61

Household spending
2014:Q4 (actual)
2015:Q1 (expected)

89
80

Capital spending
2014:Q4 (actual)
2015:Q1 (expected)

69
49

In terms of fourth-quarter expectations, fewer respondents
indicated that farm income declined than was expected in
the prior survey; farm household spending was largely as
expected. Further, significantly more respondents (relative
to prior survey) reported that capital equipment expenditures in the fourth quarter fell short of their previous year’s
levels. By and large, a significant majority of respondents
expect these downward trends to hold in the first quarter
of 2015.
The average quality farmland values reported by common respondents in the fourth quarter indicate that quality
farmland values were little changed from one year ago (+0.8
percent). However, a majority of bankers expect quality
farmland prices to soften in the first quarter of 2015 compared with prices a year earlier. Respondents indicate that,
for the quarter, their funds available for lending increased
ahead of expectations while loan demand increased but
fell somewhat short of expectations.
For this survey, we asked two special questions aimed
at assessing the general underwriting of, and the risks
associated with, loans secured by farmland. The responses
suggest that bankers are employing prudent management
practices in this area.

Percent or
index value
Land values
Quality farmland
Expected 3-month trend
Ranchland or pastureland
Expected 3-month trend

0.8%
87
–2.6%
100

Cash rents
Quality farmland
Expected 3-month trend
Ranchland or pastureland
Expected 3-month trend

3.6%
77
–2.1%
100

NOTE: Land value and cash rent estimates, as well as expected trends of
those variables, are calculated using only the banks that responded to
those respective questions in both the past and the current quarter.
Expected trends are presented as a diffusion index, see note (above) for
details about interpreting diffusion indexes.

Survey Results
Farm Income and Expenditures
A larger percentage of respondents reported that farm
income fell in the fourth quarter of 2014 compared with
the same period a year earlier. The actual index value for
the fourth quarter (78), while moderately low, is stronger
than the assessment bankers offered for farm income over
the following three months (61). (See Table 1.) Readers are
cautioned that farm income is highly volatile and subject
to seasonal patterns that occur in the agricultural sector.
Actual and expected farm income is a key determinant
of household expenditures and capital spending by farmers
and ranchers. Thus, not surprisingly, survey respondents
reported that farm household spending and capital equipment expenditures declined in the fourth quarter relative
to the same period a year earlier. The survey suggests that,

Agricultural FINANCE Monitor

Federal Reserve Bank of St. Louis 3

Figure 1

Figure 2

Year-Over-Year Change in Average Eighth District Land Values

Year-Over-Year Change in Average Eighth District Cash Rents

Percent Change

14
12
10
8
6
4
2
0
–2
–4
–6

15
10
5
0
–5
–10
2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4
Quality Farmland

Ranchland or Pastureland

NOTE: Percent changes are calculated using responses only from those banks
reporting in both the past and the current quarters.

again, the pull-back in capital spending in this quarter
was more pronounced than the decline in farm household expenditures. Respondents continue to expect further declines in both categories in the first quarter of
2015, with the more significant decline expected in capital
expenditures.

Current and Expected Land Values and Cash Rents
The annual percentage changes in land values and cash
rents are reported in Table 2 3 (also see Figures 1 and 2).
According to our banker respondents, quality farmland
values across the District increased on average 0.8 percent from one year ago. Proportionately more respondents
remain pessimistic about farmland values over the next
three months (an index value of 87). Pastureland presents a
somewhat different story: While the average value declined
2.6 percent from one year ago, bankers are largely divided
about future values.
Cash rents for quality farmland increased on average
3.6 percent from one year ago. However, proportionately
more bankers see downward pressure on farmland cash rents
over the next three months (an index value of 77). As with
the trend in pastureland values, respondents reported a
decline in pastureland cash rents: 2.1 percent lower than
one year ago. Similarly, bankers are equally divided on the
future direction of cash rents over the next quarter. Since
cash rents adjust to land values—perhaps with a lag—
expectations for cash rents for quality farmland and ranchland or pastureland over the next three months are generally
very similar to land values.

2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4
Quality Farmland

Ranchland or Pastureland

NOTE: Percent changes are calculated using responses only from those banks
reporting in both the past and the current quarters.

Outcomes Relative to Previous-Quarter Expectations
The examination of actual data relative to expectations
is an important aspect of economic analysis. Accordingly,
Table 3 provides an assessment of farm income, expenditures, and several other key variables reported in the fourth
quarter of 2014 relative to bankers’ expectations from three
months earlier.4 Compared with the previous survey, farm
income was higher than expected while actual reported
capital spending in the fourth quarter was even lower than
the relatively dim view reported by bankers three months
earlier. Farm household spending in the fourth quarter was
largely consistent with previous expectations.
Table 3 also indicates that loan demand in the fourth
quarter was relatively good but did fall a bit shy of banker
expectations. However, the availability of funds in the fourth
quarter was significantly stronger than expected three
months ago. A sizable share of bankers reported that loan
repayments exceeded previous expectations (an index value
of 105 relative to an expected index value of 82), nearly
opposite of what occurred in the prior quarter. Figures 3
through 8 plot the actual and realized diffusion index values for the six variables shown in Table 3 since the first
Agricultural Finance Monitor survey (in the second quarter
of 2012).

Agricultural FINANCE Monitor

Federal Reserve Bank of St. Louis 4

Table 3

Table 4

2014:Q4 Variables (versus year-ago levels)

Lending Conditions (versus year-ago levels)

Index value
Farm income
Expected
Actual
Difference

59
68
9

Household spending
Expected
Actual
Difference

86
86
0

Capital spending
Expected
Actual
Difference

62
52
–10

Demand for loans
Expected
Actual
Difference

109
105
–5

Availability of funds
Expected
Actual
Difference

95
123
27

Rate of loan repayment
Expected
Actual
Difference

82
105
23

Index value
Demand for loans
2014:Q4 (actual)
2015:Q1 (expected)

114
100

Availability of funds
2014:Q4 (actual)
2015:Q1 (expected)

122
116

Rate of loan repayment
2014:Q4 (actual)
2015:Q1 (expected)

100
91

NOTE: Demand for loans, availability of funds, and rate of loan repayment are reported using a diffusion index. See the note above Table 1 for
details about interpreting diffusion indexes.

Table 5

NOTE: All variables are reported using a diffusion index. See the note
above Table 1 for details about interpreting diffusion indexes. For comparison purposes, we compute diffusion indexes using only those banks
that responded to the given questions in both the past and the current
quarter. Components may not sum to totals due to rounding.

Financial Conditions
Table 4 reports our survey respondents’ assessment of
current and prospective commercial lending conditions in
the Eighth District. In the fourth quarter, a modestly larger
proportion of bankers reported an increase in loan demand
relative to the same period a year ago (index value of 114).
Bankers are equally divided, however, on their views of
loan demand over the next three months relative to a year
ago (index value of 100). By contrast, a larger number of
bankers expect that loan repayment rates will fall in the
first quarter relative to a year ago, while funds availability
remains high.

Interest Rates (%)
2014:Q4

2014:Q3

Change

Operating
Fixed
Variable

5.24
4.95

5.36
5.00

–0.11
–0.05

Machinery/
intermediate-term
Fixed
Variable

5.55
5.20

5.59
5.07

–0.04
0.13

Farm real estate
Fixed
Variable

5.36
4.88

5.29
4.87

0.06
0.01

NOTE: For comparison purposes, we calculate interest rates in both
periods using a common sample of banks that responded to the given
questions in both the past and the current quarter.

Table 5 presents the average interest rates on fixed- and
variable-rate loan products in the fourth quarter of 2014.
The results in the table reflect the pricing of farm operating loans; these rates have declined slightly, while the rates
for farm real estate credit have risen somewhat. The pricing
of machinery loans reflects a rise in variable-rate loans,
while fixed-rate loans declined slightly.

Agricultural FINANCE Monitor

Figure 3
Farm Income: Expected and Actual Values

Federal Reserve Bank of St. Louis 5

Figure 4
Household Spending: Expected and Actual Values

Diffusion Index, versus Year-Ago Levels

120

130

110

120

100

110

90
100

80
70

2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Actual

2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Expected

Figure 5
Capital Spending: Expected and Actual Values

Actual

Figure 6
Demand for Loans: Expected and Actual Values

Diffusion Index, versus Year-Ago Levels

130

140

120

130

110

120

100

110

100

60
50

Expected

70
2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Actual

2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Actual

Expected

Figure 7

Figure 8

Availability of Funds: Expected and Actual Values

Rate of Loan Repayment: Expected and Actual Values

Diffusion Index, versus Year-Ago Levels

140
135
130
125
120
115
110
105
100
95
90

120
115
110
105
100
95
90
85
2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Actual

Expected

2012:Q3 2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1

Actual

Expected

Agricultural FINANCE Monitor

Federal Reserve Bank of St. Louis 6

Special Questions
Table 6 reports the results of two special questions we
posed to our bankers for this survey. These questions
attempt to assess recent underwriting practices and, to a
certain extent, loan portfolio exposure to a sizable decline
in farmland values.
Question one: Respondents report on average that 55
percent of the value of recent farmland transactions was
financed with new debt, while 30 percent of the transaction
value was supported by a pledge of existing equity. Also, on
average, cash was used for 15 percent of the transaction value.
Question two: Our banker respondents assessed their
loan portfolio exposure relative to the financial health of
their borrowers. More than 80 percent of banker respondents reported that they had less than 50 percent of
“exposed” farm real estate loans in their portfolios: that is,
loans to borrowers who are most exposed to an unexpected
plunge in farmland prices.
Overall, these responses suggest that the credit underwriting of recent farmland secured transactions remains
sound and less than half of farm real estate loans are held
by more exposed or highly leveraged borrowers. ■

Notes

Table 6
Special Questions
For all farmland purchased by your customers
over the last three months, what percent was:
Average of responses
New debt financed
Pledged existing equity
Cash down payment
Other (owner financed)

55.2
30.2
14.5
0.2

For the farm real estate loans in your portfolio, how
would you currently characterize the distribution of
that debt according to the financial health of the
borrowers?
Share of total respondents
The minority (less than 50 percent) of farm real
estate loans originated over the past few years is
to farmers who are the most exposed to an
unexpected plunge in farmland prices.
The majority (50 percent or more) of farm real
estate loans originated over the past few years is
to farmers who are the most exposed to an
unexpected plunge in farmland prices.

84.4

15.6

An agricultural bank, for survey purposes, is defined as a bank for which at
least 15 percent of its total loans outstanding finances agricultural production or
purchases of farmland, farm equipment, or farm structures.

2 Readers are also cautioned that the number of responses in each zone is relatively

small. Statistically, this tends to suggest that the responses in each zone have a
larger plus-or-minus margin of error than for the District as a whole. We are
eliminating the zone-by-zone responses until the response rate improves.
3

Beginning with this survey, our reporting methodology reflects the annual
percentage change in land values and cash rents based on common responses.
That is, a respondent must have provided a response to questions in both the
current and previous surveys.

IL
Columbia
Jefferson City

St. Louis

MISSOURI

See http://research.stlouisfed.org/publications/afm/2014/afmq3.pdf.

Evansville
Owensboro

Louisville-Jefferson County
Elizabethtown

Springfield
Bowling Green

Fayetteville-Springdale-Rogers
Jonesboro
Jackson

ARKAN
ARKANSAS
ANSAS
AS

Fort Smith

Memphis

Little Rock-North Little Rock
Hot Springs
Pine Bluff

Texarkana

M SSIS
MIS
S SS
SIP
S
IP
PP
P
PI

Posted on February 12, 2015
© 2015, The Federal Reserve Bank of St. Louis. Views expressed do not necessarily reflect official positions of the Federal Reserve System.

research.stlouisfed.org

Full text of Agricultural Finance Monitor : 2014 Fourth Quarter

FRASER