Prospects for farm income and agricultural credit conditions rebounded sharply in the fourth quarter of 2020 across the district served by the Federal Reserve Bank of Kansas City. The average price of corn, soybeans and wheat increased more than 20% from the previous quarter and reached six-year highs in December. Livestock prices, while still less than a year ago, also improved from lows reached earlier in the year. Government payments provided broad support through the year and, together with recent price increases, the near-term outlook for the farm sector improved dramatically.
“After nearly eight years of deterioration, farm income across the Tenth District rebounded in the fourth quarter alongside sharp increases in crop prices,” the bank reports. “A majority of respondents reported that incomes of farm borrowers were higher than a year ago for the first time since 2012. This was a clear contrast to recent years in which a majority of bankers consistently reported steady declines in farm income.”
Areas of the region more dependent on livestock revenues and exposed to severe drought were somewhat less optimistic about farm income in the fourth quarter, the bank notes. For example, the share of bankers that reported higher income than a year ago was far smaller in Oklahoma and the Mountain States, where drought conditions intensified, and less revenue is attributed to crop production. In fact, about 30% of respondents in those states indicated that incomes were lower than a year ago, compared with only 8% in all other states.
Along with better prospects for farm income, credit conditions in the region also improved following several years of steady deterioration, the bank notes. About a third of bankers reported that farm loan repayment rates were higher than the previous year, the largest share since 2012. Renewals or extensions increased at the slowest pace since 2014 and tightening of credit standards also slowed. At the same time, the district measure of loan demand retracted for the first time since 2013 and fund availability expanded at the fastest pace since 2012.
A decrease in interest rates and a modest increase in demand for farmland strengthened farm real estate markets, the bank continues. Demand for farmland increased, with producers accounting for a slightly higher share of land purchases than the prior two years. Lower interest rates likely also supported farm real estate markets by reducing financing costs and making farmland a more attractive investment opportunity. Interest rates continued to decline in the fourth quarter at a faster pace than the return to farmland ownership, or capitalization rate, suggesting a relatively greater incentive to own land and generate returns through leasing.
The survey found the value of non-irrigated cropland rose 3% on an annual basis through year end. It places the annual gain the value of irrigated cropland at 4.2% and the increase in the value of ranchland at 5.1%.
Agricultural real estate markets also were supported by a slightly lower volume of farmland sales in most states. Compared with a year ago, the volume of farmland sales declined slightly in the region overall and decreased or remained steady in all states except Nebraska. Fewer sales have limited the supply of farmland on the market and have put upward pressure on prices that buyers have been willing to pay.
The combination of factors supporting farm real estate markets led to a notably more optimistic outlook for farmland values than in previous years, the bank notes. Less than 15% of bankers expected nonirrigated cropland values to decline in the next year, while more than 40% expected an increase. The outlook at the end of 2020 was in stark contrast to previous years when a similar share expected values to decline, the bank observes.
Farmland Values Cash Rents