Fed survey: Drought tempers expectations for farm income
While a strong winter wheat crop and good spring growing conditions bolstered Midwest and Mid-South farm income expectations during first half of 2012, the summer drought has significantly lowered these expectations for the third quarter, according to a new quarterly agricultural finance survey launched recently by the Federal Reserve Bank of St. Louis.
The survey, conducted from June 15 to June 29, was based on the responses of 88 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The results have been published in a new St. Louis Fed report, the Agricultural Finance Monitor, now available at stlouisfed.org. Since this is the first such survey conducted for the Eighth District, historical data and trends, and other factors such as potential seasonal irregularities, were not available for evaluation and comparison. Its results should be interpreted carefully and not be used to draw conclusions about longer-term trends.
The Eighth Federal Reserve District comprises all or parts of the following seven Midwest and Mid-South States: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. It is broken into four zones: Little Rock, Louisville, Memphis and St. Louis.
Farm income expectations
Except for the Memphis zone, lenders across the District expected third quarter 2012 farm income and capital expenditures to be significantly lower than third quarter 2011. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher lender expectations compared with the same quarter a year earlier; results lower than 100 indicate lower lender expectations), the average expectations index was 81 for the third quarter 2012 across the Eighth District; it was 140 for the second quarter.
In the Memphis zone, which includes northern Mississippi, lenders expected slightly higher income relative to last year, as well an increase in capital expenditures, thanks to a more favorable outlook for the region's cotton, rice and irrigated corn crops. The expectations index for the Memphis zone was 118 for the third quarter and 139 for the second quarter.
Meanwhile, both the value of nonirrigated cropland (or quality farmland) and the value of ranch and pastureland in the Eighth District were expected to remain the same, or rise slightly, over the next three months. Lenders estimated that District quality farmland values averaged $4,705 per acre in the second quarter, with ranch and pastureland averaging $2,349 per acre.
By zone, quality farmland values averaged $2,878 per acre in the Little Rock zone; $4,504 per acre in the Louisville zone; $2,900 in the Memphis zone and $5,835 per acre in the St. Louis zone. Ranch and pastureland averaged $1.918 per acre in the Little Rock zone; $2,464 in the Louisville zone; $1,717 per acre in the Memphis zone and $2,691 per acre in the St. Louis zone.
Across the District, gains in quality farmland prices over the next three months were expected outpace gains in ranch or pastureland prices, except in the Louisville zone, where gains in ranch and pastureland were expected to be higher than quality farmland gains.
Ag loan demand and repayments
Demand for agricultural loans was expected to remain healthy during the second quarter of 2012 compared with a year earlier, with the strongest demand being seen in the Memphis and Louisville zones. Looking ahead, lenders across the District said they also expected third quarter 2012 demand for loans to remain higher than year-ago levels, with the strongest expectations being seen in Little Rock and Memphis. In addition, third quarter 2012 loan repayment rates were expected to be on par with second quarter 2011 rates.
The next survey will be published in early November and will include two additional questions to discern the percentage of loans covered by crop insurance and the expected impact of drought on farm incomes.
With the release of the Agricultural Finance Monitor, the St. Louis Fed joins the Kansas City, Chicago, Dallas, Minneapolis and Richmond Feds in producing a regional agricultural financial conditions report. This survey was developed and conducted with the help of the Kansas City Fed. Headquartered in St. Louis, with branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the states that comprise the Federal Reserve's Eighth District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the U.S. government, and promotes financial literacy, economic education, and community development.