Lower farm incomes "continue to place downward pressure on land values and cash rents," according to the St Louis Fed's second quarter 2016 Agricultural Finance Monitor. "During the second quarter of 2016, cash rents for ranch and pastureland experienced significant deterioration as reported by survey respondents. Cash rents for ranch and pastureland declined 20.7% from last year compared with a relatively small decline of 2.2% reported for the first quarter of 2016.
As for cash rents, the report noted rents on quality farmland decreased 10%, the third consecutive quarter, and fifth in the past six quarters with a decline reported. Interestingly, the report noted, "Quality farmland value, however, demonstrated something that could be interpreted as a rebound by reflecting a decline of less than 1% compared with a 6.4% year-over-year decline reported the past quarter. However, a majority of bankers expect values to continue to trend downward for the next 3 months for both quality farmland and ranch and pastureland."
Persistent declines in farm income in the District have continued to affect agricultural credit conditions, according to the latest update from the Kansas City Fed. "Demand for non-real estate farm loans and loan renewals continued to climb in the second quarter with additional increases expected in the third quarter." The report noted that the rise in loan demand has been "driven primarily by the need to finance short-term operating expenses as profit margins have remained weak."
Loan repayment rates are also suffering, with the report detailing, "Almost half of all respondents reported that loan repayment rates in the second quarter were lower than a year ago. In addition, the severity of repayment rate problems has increased slightly over the past year."
As for the outlook, the report indicated borrowers "without sufficient liquidity, substantial net worth or large borrowing bases may find it increasingly more difficult to attain financing if their creditworthiness continues to decline. Moderating farmland values may also add pressure to borrowers and banks that rely on highly leveraged farmland as collateral."
USDA will update its farm income forecast Aug. 30, an update that looms large and is likely to show further erosion as signaled by these regional updates.