Ag Credit Conditions Continue to Steadily Deteriorate in the First Quarter of 2019 According to KC FedThu, 09 May 2019 11:22:29 CDT
According to the Federal Reserve Bank of Kansas City's quarterly Agricultural Credit Survey, compiled by Nathan Kauffman, Vice President and Omaha Branch Executive and Ty Kreitman, Assistant Economist, farm income decreased across the Tenth District and the trend of steady deterioration in agricultural credit conditions continued in the first quarter of 2019. With low income weighing on farm finances, the pace of decline in farm loan repayment rates increased slightly. In addition, carry-over debt increased again for many borrowers and bankers continued to restructure debt and deny a modest amount of new loan requests due to cash flow shortages. Major flooding and blizzards across some regions in the District late in the first quarter may also put additional financial pressures on some farm borrowers as damages continue to be assessed. (Charts and tables included in the original version of this story can be accessed by clicking here to jump to the story’s original format.)
A majority of bankers across the District continued to report decreases in farm income during the first quarter. Despite a slight improvement in livestock prices toward the end of the period, the pace of decline in farm income quickened slightly from a year ago and from the prior quarter. A similar pace of decline also was expected in coming months. However, significant increases in hog prices in the final weeks of the quarter and into April improved revenues for some operations in the livestock sector.
Reductions in farm income were sharpest in Nebraska and Missouri, states heavily concentrated in corn and soybean production. The drop was largest in Missouri, where farm income was steady a year ago. While some areas were heavily affected by spring flooding and blizzards, it may be months before the full impact to farm income is realized as immediate damage and implications for the 2019 operating cycle were being evaluated.
Weakness in farm income continued to weigh on farm household and capital spending across the District. Declines in spending by farm borrowers remained similar to the previous quarters after moderating slightly in 2018. While following similar trends, decreases in capital spending remained larger than cuts to household spending and that relationship was expected to continue into the next quarter.
Farm spending declined at a pace similar to the previous year in all District states with the exception of Oklahoma, where bankers were less pessimistic. Similar to changes in farm income, the pace of decline in farm household and capital spending was sharper in Missouri when compared with a year ago. The decrease in capital spending also was notably smaller in Oklahoma and remained sharpest in Nebraska.
As farm income remained low, demand for farm loans remained high and the ability of farm borrowers to repay loans weakened at a slightly faster pace than in previous quarters. Lower rates of repayment in Missouri and Nebraska were the largest contributors to overall weakness in farm loan repayment rates across the District. Similar to farm income, recent severe weather also may have contributed to slower repayment rates and increased loan demand, but the full impact remains uncertain pending assessment of damages.
As farm cash flows remained weak, bankers continued to restructure debt and even deny some farm loan requests. Despite moderating from a high of 23 percent in 2017, about 14 percent of new farm loan requests involved restructuring to meet liquidity needs. New loan requests were denied at a pace of 8 percent because of cash flow shortages, a rate similar to a year ago. While remaining near the District average, the rate of denial on new loan requests in Kansas increased moderately compared with a year ago.
Additionally, further reductions in farm income also led to another year of increases in carry-over debt for some borrowers. On average, about 20 percent of farm borrowers throughout the District had an increase in carry-over debt. Compared with last year, the share of borrowers with an increase in carry-over debt nearly doubled in Missouri and was slightly higher in Oklahoma. In all other states, the share declined slightly.
With continued deterioration in agricultural credit conditions, bankers also further tightened credit standards. About 25 percent of all bankers in the District increased collateral requirements relative to last year. Over 30 percent of survey respondents in Kansas, Missouri and Nebraska increased collateral requirements, in contrast to about 10 percent of banks in Oklahoma and the Mountain States.
Debt service capacity in the farm sector also has tightened in recent years. Survey respondents indicated annual cash flow was only slightly greater than annual debt obligations for nearly half of borrowers with crop operating loans in the Tenth District. A similar capacity for servicing debt was reported for other types of loans. The coverage of loan payments by cash flow was tighter in Nebraska, where respondents reported that more than half of borrowers, regardless of loan type, had a debt service coverage ratio of less than 125 percent.
Interest Rates and Farmland Values
Interest rates on all types of agricultural loans in the first quarter increased at a moderate pace. Compared with the first quarter of 2015, fixed interest rates have increased slightly more than variable rates for the same types of loans. For example, variable rates on operating loans have increased about 110 basis points over that time compared with an increase of nearly 120 basis points on fixed rates. Similarly, variable and fixed rates on farm real estate loans over that same period increased by 80 and 110 basis points, respectively.
Farm real estate values in the Tenth District were relatively steady compared with a year ago despite pressure from weaknesses in the farm sector and higher interest rates. In fact, the value of nonirrigated cropland increased slightly for the first time since 2015. The value of ranchland across the District also increased slightly for the third straight quarter while irrigated cropland declined slightly, but at the slowest rate since 2015.
In contrast to the change in farm real estate values across the District, the value of nonirrigated cropland declined slightly in Nebraska and Kansas. The decline in the value of nonirrigated farmland was largest in Kansas while there was a moderate increase in Missouri and Oklahoma. Even as values have appeared to stabilize in recent quarters, slightly higher interest rates as well as supply and demand factors of farm real estate markets are likely to remain key risks to the outlook for farmland.
Alongside ongoing weakness in the Tenth District farm economy, agricultural credit conditions deteriorated slightly in the first quarter. Demand for farm loans remained strong and weaknesses in farm finances also put added downward pressure on farm loan repayment rates and farm spending. Despite higher interest rates and added deterioration in farm income and credit conditions, however, farmland markets remained relatively steady as an important source of support for Tenth District agriculture.
Source - Federal Reserve Bank of Kansas City
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