Improved commodity prices, federal aid improve outlook

Improved commodity prices, federal aid improve outlook
Ag credit conditions mixed for federal reserve districts in heartland.

Pandemic-relief aid along with mostly bountiful harvests and a slight recovery in prices have painted an optimistic picture for the end of 2020, according to the third-quarter (October) agricultural credit conditions survey by the Federal Reserve Bank of Minneapolis, Minn. Those results were also replicated in the Seventh Federal Reserve District of Chicago, Ill., and the 10th District in Kansas City, Mo.

Joe Mahon, direction of regional outreach in the Minneapolis-based district, said in a recent overview that the outlook for the fourth quarter is up slightly, with a mild improvement due to government relief, good production and small price increases.

Mahon said the latest survey of agricultural bankers in the region found that many were upbeat about agricultural incomes, but the overall outlook for farm finances was more modest.

“Across the district, a third of lenders expected farm income to increase in the fourth quarter, compared with just under a quarter who expected further decline. The forecast for capital spending was more moderate, with 31 percent of respondents expecting decreases, compared with 24 percent who expected increases. Two-thirds of lenders thought farm household spending would remain unchanged,” Mahon said.

Midwest states

The Seventh Federal Reserve District saw corn and soybean yields in 2020 come close to their historical highs, with some states reaching record levels. The U.S. Department of Agriculture forecasted the five district states – Iowa, Michigan and parts of Illinois, Indiana and Wisconsin – harvest of corn for grain in 2020 to increase by 9% from 2019. Likewise, USDA forecasted soybean production for the five district states to rise by 16% from 2019.

In his latest AgLetter report, economist David Oppendahl said the average price of corn in September 2020 was 9.3% higher than in August but still 10% lower than a year ago.

In October, the USDA raised its price forecasts for the 2020–21 crop year for both crops—to $3.60 per bushel for corn and $9.80 per bushel for soybeans. “When calculated with these price estimates, the projected revenues from the 2020 corn and soybean harvests for district states would increase from 2019 by 10% and 33%, respectively,” Oppendahl said.

Oppendahl shared that the Seventh Federal Reserve District’s agricultural credit conditions were mixed during the third quarter of 2020. The availability of funds for lending by agricultural banks was much higher in the third quarter than a year ago, but the demand for non-real estate farm loans was lower than a year earlier for the first time in seven years.

In the third quarter of 2020, livestock prices were generally recovering from the impacts of the Covid-19 pandemic. Compared with a year earlier, September average prices for hogs, cattle, and eggs were up 5%, 1% and 22%, respectively. While milk’s average price in September was down 7% from a year earlier, its average price for the third quarter of 2020 was up 1%. There was also a pickup in agricultural trade, which helped matters, Oppendahl explained.

Additionally, by the end of October, the Coronavirus Food Assistance Program (CFAP) had dispersed over $2.4 billion to farm operations in the five district states (24% of the $10.3 billion sent nationwide).

The AgLetter said: “As one Wisconsin respondent noted, ‘With higher prices and government payments, dairy and crop producers will end the year better than expected.’”

10th District outlook

Nathan Kauffman, vice president and Omaha, Neb., Branch executive, and Ty Kreitman, assistant economist at the Kansas City Federal Reserve Bank, in their latest Ag Credit Survey, also offered their improved outlook for the region’s farmers due to the increases in commodity prices and additional influx of government aid. The region includes Kansas, western Missouri, Nebraska, Oklahoma and the Mountain states of Colorado, northern New Mexico and Wyoming.

“After dropping sharply in the second quarter due to disruptions associated with the COVID-19 pandemic, the prices of most agricultural commodities began to recover in the summer months. Strengthening demand supported additional increases in crops prices through the third quarter and into October, expanding profit opportunities for many producers heading into harvest. As a result, credit conditions deteriorated at a notably slower pace and the share of bankers reporting declines in farm income and loan repayment rates dropped from the previous quarter,” Kauffman and Kreitman wrote.

The credit survey stated better profit opportunities for both crop and livestock producers, as well as additional government support across the sector, created more favorable conditions for farm finances in 2020 than earlier in the year. “Farm income and credit conditions remained weak, but the pace of deterioration slowed from the last quarter and demand for farm loans was more subdued. Amid improvement to cash flows and repayment capacity, bankers were monitoring a smaller share of loans for problems.”

Kauffman and Kreitnman noted that bankers continued to express concerns, however, about the potential for renewed pressure in the months ahead, depending on the path of agricultural commodity prices and government support programs.

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