There's been strong growth in farm incomes over the last six months, according to the latest poll of agricultural lenders in the Ninth Federal Reserve District.
The Ninth Federal Reserve District encompasses Minnesota, North and South Dakota, Montana and portions of Wisconsin and Michigan. The poll of 67 agricultural lenders was conducted in April and covers the first three months of 2021, said Joe Mahon, regional outreach director for the Federal Reserve Bank of Minneapolis, during a May 12 webinar. The lenders surveyed are with Federal Reserve member banks that have 25% or more of their portfolio in agricultural loans.
The factors driving the growth include the rebound in commodity prices, improvement in international trade conditions and government payments, he said. Net farm incomes rose 43% in 2020 due in large part to government payments and rising commodity prices, according to USDA's Economic Research Service.
The results for the first quarter of 2021 mark a reversal in conditions seen in agriculture over the last few years, Mahon said.Agricultural lenders in the Ninth District are surveyed four times a year, but the spring one is anticipated because it's a check-in with lenders as farmers head into the fields. Looking at this quarter's results compared to the first quarter of 2020, 87% of lenders expect farm income to increase. Household and capital spending are also expected to increase. Capital spending tends to track closely to farm income, Mahon said.
Not surprisingly, given the increase in farm income, there has been higher repayment rates for loans and less demand for loans.
What's ahead
The agricultural lenders surveyed are optimistic about farm income with nearly three-quarters expecting farm income to increase. Household and capital spending are projected to be more stable.
Repayment rates are expected to continue stable over the next three months.
"We saw interest rates on ag, ag loans continued to trend downward," Mahon said. "They didn't drop as much as we saw over the previous two quarters, but they came down again for all categories of loans that we asked about."
The last peak in ag interest rates was in 2019.
Land
There was a big run up in land prices in the early part of the last decade.
"Folks were sort of concerned about the rate in which land values were increasing," Mahon said. "(There were) some concerns about whether land might be . . . agricultural land might be . . . a bubble, kind of in that post financial crisis era."
Land values did come down the last few years as farm incomes moderated, but values are trending upward again. He cautions about using state-by-state results because of the limited number of respondents, instead preferring to use the regionwide increase of 6.8%.
Cash rents are moving upward too, with an increase of 7.7% reported in the Ninth District, but Mahon is cautious when asked if upward movement in rental rates signals an increase in land values.
"Over the last few years, we've seen bigger movements in land values than rental rates . . . that's both during the period where we saw soaring increases in land values, and also over the last few years where we saw land values start to retreat from that peak," Mahon said. "So those rental rates overall I would just characterize as being a little bit more stable than land values."
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