Report Calls Farm Economy Solid

OMAHA-(World-Herald)--The nation's farm economy "remained solid" in the second quarter of this year, a report from Federal Reserve economist Jason Henderson of Omaha said Friday, with expected strong income this year from corn and soybeans.

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Farm Expenditures: How Do You Compare With The Averages?

URBANA, Ill.-(UIUC)--You and your neighbors have all said at some time or another that the 2009 crop was the most expensive you every planted. The cost of fertilizer probably ensured that fact and seed corn prices had a lot of input as well. Certainly 2009 production costs were above that of the two prior years, but after the big jump up in 2007, production cost for 2008 did not rise as rapidly, aiding profitability. USDA has just calculated your 2008 production costs, and while high, the upward trend slowed a bit.

Farm production expenses were $307 billion in 2008, up 8.3% from 2007, but 2007 farm production expenses were up more than 19% compared to the prior year. The USDA survey indicated that higher machinery costs lead the way for 2008 expenses, both in the tractor & combine category that was up 32.6% and in the “other machinery” category that was up 34.1%. However, output for machinery and vehicles was only 7% of total farm outlays.

The major category was chemicals, fertilizer, and seed, which was 16% of the outlays, and totaled more than $49 billion. Feed expenses were next highest at nearly $47 billion. While fuel expense was only 5.2% of total outlay, USDA economists delved into the $16 billion that farmers paid for energy. Diesel fuel was nearly 62% of that, with gasoline at nearly 19%, LP gas at 13%, and other fuels about 7%. The average fuel cost per farm approached $8,000.

Over the course of 2006 to 2008, all categories of expense climbed incrementally, except for the outlay for livestock and poultry. Livestock producers paid more for feeder calves and feeder pigs in 2007 than they did in 2008. Specifically the 2007 total was $33 billion, compared to only $28.3 billion in 2008. Notable is the fact that interest expenses held steady from 2007 to 2008.

Over the five year period from 2004 to 2008, total farm production costs have risen from just under $212 billion to just over $307 billion. The cost of feed is the largest expense, rising from $29.7 billion in 2004 to $46.9 billion in 2008. The next highest category, farm services, includes all crop custom work, veterinary custom services, transportation costs, marketing charges, insurance, leasing of machinery and equipment, general and miscellaneous business expenses, and utilities. Farmers saw those costs rise from $26.8 billion in 2004 to $38 billion in 2008. For 2008, labor expenses of $29.7 billion slipped ahead of fertilizer at $22.5 billion. However, as a percentage of the totals both farm services and labor fell slightly.

For crop farms, which reported an average of $175,141 in total expenses, the farm services bill consumed $23,000, fertilizer consumed $20,000, the cash rent bill was nearly $20,000, and labor was more than $21,000, all for 2008. The seed bill last year was over $14,000 and the chemical bill was just under $11,000.

For livestock farms in 2008, which averaged $113,390 in average expenditure, the feed bill was just under $35,000, the cost of feeder stock was just over $20,000, and farm services was nearly $13,000.

Across the Cornbelt the average expenditure per farm was $145,555 with feed outlay at $17,558, cash rent at $16,919, farm services at $14,621, and fertilizer at $14,525. Interestingly, Cornbelt farmers spent nearly $7,500 on new machinery in 2007, versus nearly $10,700 in 2008.

Summary:

There is no surprise that farm expenses have risen in every category except for interest payments. However, the surprising fact about USDA’s survey of farm outlays is the deceleration of the increase from 2007 to 2008. Following the 19% increase in expenses from 2006 to 2007, the rate climbed only 8% more in 2008. The report on 2009 expenses will not be issued until August of 2010. While fertilizer and seed costs rose expectedly in 2008, the largest jumps were in the costs that farmers had to pay for farm machinery.

(Source: Stu Ellis, University of Illinois.)

Farm Values Post First Decline Since 1987

WASHINGTON-(Drovers)--USDA's Agricultural Land Values and Cash Rents Annual Summary, released August 4, shows U.S. farm property losing some value over the past year, after more than two decades of steady gains.

Farm real estate values, a measurement of the value of all land and buildings on farms, averaged $2,100 per acre on January 1, 2009, down 3.2 percent from 2008. The 3.2 percent decrease from 2008 is the first decline in farm real estate value since 1987, according to the report.

Regional changes in the average value of farm real estate ranged from virtually no change in the Northern and Southern Plains regions to an 11 percent decline in the Mountain region. The highest farm real estate values remained in the Northeast region at $4,830 per acre. The Mountain region had the lowest farm real estate value, $922 per acre.

Both cropland and pasture values are down from the previous year. Cropland values declined by $110 per acre (3.9 percent) to $2,650 per acre.

In the Cornbelt region, the average cropland value decreased 4.0 percent from the previous year, to $3,870 per acre. However, in the Northern Plains and Delta regions, cropland values rose 1.6 percent and 0.6 percent, respectively.

Pasture value declined by $20 per acre (1.8 percent) from 2008 to $1,070 per acre. The Mountain region had the largest percentage decrease in pasture value, 16 percent below 2008.

The report notes that contraction in the overall economy has caused less commercial and residential development in many regions. Livestock and crop commodity prices have declined from a year earlier, thus producers and investors are less optimistic than a year ago. A decrease in the demand for recreational land has also contributed to the overall decrease in land values.

The full report is available from the USDA's National Agricultural Statistics Service.

(Source: Drovers.com)

Farm Credit Getting Tighter as Bad Loans Grow, Regulator Says

WASHINGTON-(Bloomberg)--The cost of credit in rural areas is rising as lenders become more cautious in extending loans to farmers, according to Leland Strom, the chief executive officer the U.S. Farm Credit Administration.

Nonperforming loans grew by almost $500 million to $3 billion in the first quarter, indicating a need to lend more conservatively, Strom said today at a congressional hearing in Washington. Still, the U.S. Farm Credit System remains well- capitalized, with a 7.9 percent increase in net income to $2.9 billion last year, Strom said.

The lending environment "will be more challenging than the system has faced in many years," Strom said. The FCA is an independent agency that regulates the banks and other entities of the Farm Credit System, the largest agricultural lender in the U.S.

Agricultural producers have so far fared better than other parts of the U.S. economy during the global financial crunch, which has cost banks and businesses worldwide more than $1.47 trillion in writedowns and credit losses. Debt loads for agricultural producers are the lowest in at least 50 years, according to government data.

Low leverage levels have helped farmers withstand declines in wheat, corn and soybean prices, according to Bob Stallman, president of the American Farm Bureau Federation. The commodities were all down at least 23 percent from last year's records, as of yesterday.

Today's hearing was held by the House Agriculture subcommittee overseeing farm lending. Also scheduled to testify was Michael Gerber, president and chief executive officer of the Federal Agricultural Mortgage Corp. Farmer Mac, as the government-sponsored company is known, helps U.S. farmers obtain long-term financing.

AUDIO: Ag Banks Hold Strong, Still Feel Financial Pressures

Agricultural Credit Standards Tighten

OMAHA-(Federal Reserve)--Agricultural borrowers are increasingly concerned about access to credit. Amid economic weakness and a financial crisis, commercial banks have tightened credit standards for various types of loans. While agricultural borrowers may be concerned about credit availability, agricultural lenders are equally concerned about the creditworthiness of agricultural borrowers as the farm economy weakens.

As the financial crisis deepened, agricultural banks outperformed other commercial banks - but they still saw their profits decline. Despite questions regarding credit availability, commercial banks are extending credit to agricultural borrowers at lower interest rates. The soft erosion in agricultural loan quality, however, has led agricultural lenders to tighten credit standards and shift more financial risk to borrowers.

Solid, but falling profits at agricultural banks

The U.S. financial crisis has trimmed the profitability of agricultural banks and other commercial banks. However, agricultural banks performed much better than their banking peers. The strongest performance emerged from smaller agricultural banks.

Based on Agricultural Finance Databook information, the financial performance of agricultural banks weakened in 2008.¹ The Federal Reserve defines agricultural banks as commercial banks with agricultural loans accounting for more than 14 percent of their loan portfolio.² According to the Federal Reserve, the average return on assets and equity at agricultural banks steadily declined in 2008. By September 2008, the return on equity at agricultural banks declined to 7.6 percent, and the rate of return to assets edged down to 0.8 percent (Chart 1).

Agricultural bank returns, however, were much stronger than returns at other commercial banks. By September 2008, returns for all commercial banks had plummeted more than 70 percent, with the return on equity dropping to 2.86 percent and return on assets falling to 0.28 percent.3 Agricultural banks also had much stronger performance than other similarly sized small commercial banks, those with less than $500 million in assets. The return on equity and assets at smaller banks was 2.4 and 0.3 percent, respectively, well below the returns at agricultural banks.

Several factors contributed to the dip in agricultural bank profits. First, interest rates on agricultural loans have declined, trimming gross revenue on loan activity. According to agricultural credit surveys from the Federal Reserve, interest rates on all types of agricultural loans have dropped significantly below 2006 levels.⁴ The average interest rate on operating loans dropped from more than 9.0 percent in 2006 to 7.0 percent in the fourth quarter of 2008. During the same time, the average rate on farm real estate loans fell from roughly 8.5 percent to 6.75 percent.

A rise in the cost of capital also squeezed bank profits. One measure of the cost of funds is the London Inter-Bank Offered Rate (LIBOR), the rate banks pay to borrow funds from other banks in the London money market and a benchmark for other short-term interest rates. In September, the financial crisis fueled a spike in LIBOR, which raised the cost of funds for banks. The spread between the interest rate paid to acquire funds (LIBOR) and the interest rate earned on agricultural loans narrowed, suggesting lower profit margins (Chart 2). In the fourth quarter, the spread widened as LIBOR fell sharply, suggesting some improvement in bank profitability.

However, loan delinquencies have edged up, trimming agricultural loan profitability. In 2008, delinquency rates on agricultural loans climbed steadily from 1.08 percent in the first quarter to 1.23 percent in the third quarter (Chart 3).⁵ At the same time, net charge-offs on agricultural loans rose from 0.12 to 0.19 percent. Delinquency rates and net charge-offs on agricultural loans rose faster in the largest 100 U.S. banks. In fact, at smaller commercial banks, delinquency rates on agricultural loans actually declined.

Impact on agricultural lending

Despite their relatively strong performance, agricultural banks tightened lending standards to preserve capital and manage the risk arising from the economic downturn. Agricultural banks continue to originate agricultural loans at relatively low interest rates. However, banks are increasing collateral requirements and shrinking loan maturity as agricultural loan quality deteriorates.

Agricultural banks, in general, report ample funds available for operating loans.

For example, according to the agricultural credit survey of the Federal Reserve Bank of Kansas City, 70 percent of bankers reported the amount of funds available for farm operating loans in the fourth quarter of 2008 was unchanged from the year before, with an additional 14 percent having more funds available. And these banks expected to have roughly the same amount of funds available in the first quarter of 2009. Moreover, only 4 percent of the bankers reported refusing a loan due to a shortage of funds, the same percent as in 2007.

Nevertheless, agricultural bankers responding to the Kansas City Fed’s agricultural credit survey reported raising collateral requirements on operating loans.⁶ In the fourth quarter of 2008, the collateral requirements index rose almost 20 percent above year-ago levels (Chart 4).⁷

Other Federal Reserve data indicate that farm real estate accounted for roughly 17 percent of the collateral used for the nation’s farm operating loans in the fourth quarter of 2008, up modestly from previous years. The use of farm real estate as collateral was more prevalent in larger operating loans. Moreover, small and mid-sized banks tended to use farm real estate as collateral more often than larger banks.⁸

The increase in collateral requirements does not appear to have severely restricted loan activity in the agricultural sector. In fact, farm debt levels rose through 2008. By the third quarter of 2008, farm debt held at commercial banks was 8.2 percent above year-ago levels, with real estate debt up 10 percent and non-real estate debt up 6.3 percent. The volume of non-real estate loans rose sharply in the fourth quarter, with increases to both the crop and livestock sectors.

While banks still made loans, they adjusted loan terms in response to the increased risk associated with farm lending. The average risk rating on agricultural loans edged up in 2008, and bankers continued to report deteriorating loan quality as livestock profits were elusive and margins declined for the crop sector.⁹

And carry-over debt appears to be rising, as more agricultural bankers reported an increase in operating loan renewals and extensions in the fourth quarter. In response to higher risk, banks reduced the length of operating loans. For example, after steadily rising since 2001, loan maturity on agricultural loans dropped 20 percent, to 12 months, in the fourth quarter of 2008. Simply put, as agricultural risk increased, banks were more reluctant to extend loans for longer periods of time.

Risks to agricultural lending in 2009

The recession poses many risks to agricultural lending in 2009. In terms of supply, the further deepening of the financial crisis could limit funds for agricultural loans. At the same time, a weaker farm economy could erode the creditworthiness of agricultural borrowers when loan needs are most pressing.

A primary risk to agricultural lending is the availability of funds. Banks can raise funds from a variety of sources - equity and debt markets, deposits, and nontraditional sources such as Federal Home Loan Banks. A deeper financial crisis could threaten a bank’s ability to raise funds from nondepository sources.

For example, some large agricultural lenders have struggled to raise debt capital by issuing commercial paper. After peaking in November 2007, the volume of commercial paper issued by domestic financial institutions had dropped roughly 15 percent by the fourth quarter of 2008. Moreover, equity values of larger banking institutions have fallen, which also limits their ability to raise capital.

Bank deposits are a major source of loanable funds for agricultural banks. The risk is that lower interest rates on CDs and other savings vehicles could slow bank deposit growth, limiting funds available for agricultural loans. Through the third quarter of 2008, domestic deposits at agricultural banks remained above 2007 levels, according to the FDIC. Still, rising job losses from the recession pose a risk to deposit growth because people could lose their income stream and tap savings for household needs. In turn, fewer deposits could limit funds for agricultural loans.

Despite these risks, smaller agricultural banks have access to federal government and Federal Reserve funds. In response to higher risk, agricultural bankers indicate they are increasing their use of guarantees from the U.S. Department of Agriculture’s Farm Service Agency. Moreover, small agricultural banks have access to primary and secondary credit funds through the Federal Reserve’s discount window and have the ability to request funds for seasonal credit, especially during the planting and harvest seasons, when funding needs are more significant.¹⁰

Another pressing concern is the creditworthiness of agricultural borrowers. In 2009, profit margins for crop producers are expected to narrow, and profitability for livestock producers is expected to remain elusive (Henderson and Akers). While loan defaults remain low, delinquency rates, charge-offs, and risk ratings are rising, and continued deterioration in the agricultural economy could further erode the creditworthiness of agricultural borrowers. Further weakness in agricultural loan quality could lead to additional tightening of lending standards and an increase in loan denials for agriculture.

Also, the expected decline in agricultural income has contributed to softer farmland values. Agricultural credit surveys from the Federal Reserve indicate that farmland values edged down in the fourth quarter of 2008. Farmland is a major source of collateral for agricultural loans, especially for smaller agricultural banks. The decline in farmland values could shrink the amount of collateral available for agricultural loans.

In sum, the financial crisis and resulting recession have dimmed economic prospects for the agricultural economy and trimmed profits at agricultural banks. Still, agricultural banks have performed much better than other commercial banks and appear to have funds available for agricultural loans. However, a steeper downturn in the agricultural economy could erode the creditworthiness of borrowers and further tighten credit standards on agricultural loans. With the combination of weaker profits at financial institutions and rising risk on agricultural loans, agricultural borrowers are being asked to accept more of the financial risk emerging from a volatile agricultural environment.

(Source: Jason Henderson, Vice President and Omaha Branch Executive, Federal Reserve Bank of Kansas City.)

Direct Effects Of The Economic Crisis On U.S. Agriculture

WASHINGTON-(USDA)--The economic crisis will have direct and indirect effects on U.S. agriculture. The direct effects will come from changes within the U.S. economy. The indirect effects will stem from the impacts of the crisis on foreign income, trade, and world energy prices.

The direct effect of the crisis on U.S. agriculture is expected to be modest. On the demand side, the crisis is likely to lower U.S. GDP (Global Insight (2009) projects a decline of 2.7 percent in 2009), and thereby consumer spending on food. This demand effect, though, will probably be small. MostU.S. consumers have a sufficiently high standard of living that demand for food is not very sensitive to changes in income.9 Consumers are less likely to eat out at restaurants, and an increasing share may choose to shop for food at warehouse outlets. Total consumer expenditures on food (including food away from home) will fall, but the amount of food actually consumed will not. This will likely result in a changing composition of demand for agricultural commodities and products and, thereby, a fall in some agricultural prices.

For example, demand may shift from more expensive beef and fish to less expensive meats, such as poultry. Consumers may also reduce purchases of "organic" foods in favor of more "industrial" foods.

On the supply side, the disruption of overall U.S. financial markets could inhibit lending to farmers and agribusinesses. Agribusinesses heavily dependent on credit could be constrained, which, in turn, could lower demand for agricultural inputs. In recent years, farm borrowing has increased from large regional banks, some of which have moved toward riskier lending behavior (FDIC, 2008). Yet, most rural banks that lend to farmers are not closely tied to the financial world that created, and is now suffering from, the financial crisis. Agricultural borrowers and lenders tend to have secure long-term relationships, which should mitigate the crisis’s effect on the flow of loans to farmers.ects of the Economic Crisis on U.S. Agriculture