The region's farmers and ranchers remain financially strong, the Federal Reserve Bank of Kansas City said Wednesday, but dry weather, lower crop prices and higher expenses slowed the growth of farm income and land values in the first three months of this year and may dampen gains in the rest of 2013.
“It's a high mountain plateau in terms of farm income,” said Fed economist Nathan Kauffman of Omaha, in part because crop insurance would cover weather-related losses or a sharp drop in crop prices.
Projections by the U.S. Department of Agriculture suggest farm income this year will be on par with 2012, followed by a decline in 2014 of as much as 25 percent, Kauffman said, although so far there's no hard evidence to indicate whether income will drop sharply or only soften gradually.
Even with a 25 percent drop, U.S. farm income would still be higher than it was in 2010, USDA figures show.
Bankers are watching farmers who are more highly leveraged, especially beginning farmers and those who have borrowed to expand their holdings. “Some bankers are thinking about that a little more,” Kauffman said.
Although overall farm debt is low by historical standards and deemed “manageable” if farm income drops, one-third of bank borrowers had debts greater than 40 percent of their assets. A drop in land values or farm income and an increase in interest rates could hurt their ability to meet debt obligations, Kauffman said.
The bank's quarterly survey of bankers said farm land values rose 20 percent from a year ago, continuing a three-year string of double-digit increases. The bank's region covers Nebraska, Wyoming, Colorado, Kansas, Oklahoma and parts of Missouri and New Mexico.
In the region, first-quarter values compared to a year earlier were up 19.3 percent for non-irrigated farmland, 21.5 percent for irrigated land and 14.3 percent for ranchland. In Nebraska, values were up 17.3 percent for non-irrigated land, 22.6 percent for irrigated land and 17 percent for ranchland.
But the pace of land value increases is slower, possibly because farm income is rising more slowly. For example, the value of irrigated farmland rose 9 percent during the first quarter of 2012 but 2.9 percent in the first quarter of 2013.
It's unclear whether the slower gains will continue, although if farmers expect their income to flatten in 2013 and decrease in 2014, they may seek lower prices for land, Kauffman said.
High feed and forage costs have hurt livestock profits, said the report by Kauffman and assistant economist Maria Akers. Seed and fertilizer prices also were high, and inventories of grain were higher than expected, reducing grain prices at the end of the first quarter.
Crop prices should fall during this year's growing season and wheat harvest, the report said, which should help livestock and ethanol producers but slow the growth of farm income. If normal weather patterns return, the report said, corn and soybean prices may drop as production increases.
The bankers surveyed by the Kansas City Fed said farm household and capital spending were strong in the first quarter, partly because of an extension of favorable tax policies. Such spending should slow down in coming months because of softening farm income and higher operating costs.
The bankers said demand for farm operating loans was weak because many farmers were paying cash for seed, fertilizer and other costs. Fewer farmers sought loan renewals or extensions, and loan repayment rates were higher than last year, the bankers said, thanks to healthy farm income over the past several years.
The bankers said livestock producers increased their debts because of recent losses caused in part by drought in much of the region, along with higher costs.
While the drought has eased in parts of Nebraska, Kauffman said, Colorado, New Mexico and western Kansas were still dry, affecting wheat crops more than areas where corn and soybeans are grown.
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