Ag conditions mixed in Federal Reserve report
Farm debt continues to weigh on agriculture banks' liquidity.
The Federal Reserve Board recently released its July 2018 "Beige Book" update, providing an overview of the current state of the U.S. economy as well as the U.S. agricultural economy.
The update reported that economic activity has continued to expand across the U.S., with 10 of the 12 Federal Reserve districts reporting moderate or modest growth. The outliers, the report said, were the Dallas, Texas, district, which reported strong growth driven, in part, by the energy sector, and the St. Louis, Mo., district, where growth was described as slight.
“Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies,” the update stated.
Labor markets are tight, with many reporting that an inability to find workers constrained growth.
Consumer spending, on the other hand, was up in all districts, particularly in Dallas and Richmond, Va.
Higher input prices and shrinking margins were also reported, and six districts specifically mentioned trucking capacity as an issue and attributed it to a shortage of commercial drivers.
Several districts reported slow growth in existing home sales but were not overly concerned about rising interest rates. Commercial real estate was largely unchanged, the report noted.
Agricultural conditions mixed
The Federal Reserve Bank of Atlanta, Ga., reported that agricultural conditions across the district were mixed.
“Significant rain improved drought conditions in Alabama, Florida and Georgia; however, there were abnormally dry conditions reported mostly in Louisiana and, to a lesser degree, in Mississippi and Tennessee,” the Fed reported.
Additionally, the district reported that some areas experienced above-normal temperatures and locally heavy rains, resulting in some crop stress.
The June forecast for Florida's orange crop was left unchanged from May, but it was still down significantly from the prior season.
On a year-over-year basis, prices paid to farmers in the district during April were up for corn, rice, soybeans, broilers and eggs and down for cotton and beef.
In the Seventh District, which serves a five-state region comprising all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin, the outlook for agricultural income dimmed somewhat due to falling commodity prices.
According to the report, crop farmers said field conditions were mostly excellent and better than last year. However, falling corn and soybean prices have reduced profit expectations for the upcoming harvest.
Livestock farmers in the region also continued to struggle overall, with some reports of asset sales by hog producers and closures of dairy operations.
“Contacts throughout the district expressed heightened concerns about the impact of trade disputes and tariffs on the agricultural industry,” the update noted.
Representing the Eighth District, the Federal Reserve Bank of St. Louis reported that agriculture conditions weakened slightly from the previous reporting period but improved slightly from the same time last year.
“The percentages of corn, cotton and rice rated fair or better in June declined slightly relative to the prior month, while that of soybeans increased modestly. However, both the corn and soybean percentages were higher than a year ago, the cotton percentage was little changed and the rice percentage was down slightly,” the latest report noted.
Estimated soybean acreage in the district saw a substantial rise in Illinois relative to March planting intentions but was revised downward in Missouri.
According to the report, agricultural conditions in the Ninth District — Minnesota, Montana, North and South Dakota, 26 counties in northwestern Wisconsin and the Upper Peninsula of Michigan — were stable relative to the previous report.
“Despite a late start to the planting season, crop progress in district states as of late June was generally in line with five-year averages, and the majority of crops were rated in good or excellent condition,” the report said. “However, some areas of the Dakotas and Montana were experiencing dry or moderate drought conditions.”
The 10th District Federal Reserve Bank in Kansas City, Mo., reported its farm economy has weakened slightly and that trade uncertainty and expectations for larger supplies in 2018 have put downward pressure on crop prices. Drought also continues to persists in some of the regions of the district, the report noted.
“Corn prices were slightly lower than a year ago following a sharp decline in June, while soybean prices declined even more rapidly and reached an eight-year low,” the report said. “Although prices for wheat remained steady and slightly higher than a year ago, revenues in Kansas and Oklahoma could remain strained as nearly half of winter wheat acreage was rated as poor or very poor due to dry conditions.”
The update noted that livestock prices were slightly lower than one year ago following modest declines in June.
“Hog prices, which continued to be supported by expectations of increased U.S. exports and relatively strong global demand, increased slightly in June but remained slightly below levels from one year ago,” the report said.
In the 11th District, representing Texas, northern Louisiana and southern New Mexico, drought conditions became slightly less severe but more widespread over the reporting period, according to the report.
“Texas farmers were concerned because the drought will likely suppress crop yields, and crop prices are lower due to trade restrictions and strong U.S. production prospects,” the report noted.
Further, the report noted that grazing conditions remained well below average and that cattle prices experienced a slightly higher-than-average seasonal decline over the past six weeks.
Livestock loans drive uptick in lending
Cortney Cowley and Ty Kreitman, economist and assistant economist, respectively, at the Kansas City Federal Reserve Bank, also recently provided an update on the lending activity in the agriculture sector, relaying that lending increased slightly in the second quarter of 2018 as a result of larger loans for livestock.
Loans for both feeder and other livestock increased 10% from a year ago, while farm machinery and equipment lending contracted nearly 30% following three consecutive years of increases. Cowley and Kreitman said the larger loans in the livestock sector could be the result of higher prices for feeder and breeding animals in the second quarter and longer-term implications of increasing consolidation.
“In the short term, higher livestock prices in the first half of the quarter likely were responsible for the increased size of livestock loans. Longer term, the size of livestock loans also has been trending higher, suggesting that consolidation has contributed to fewer, larger farms with larger lending needs,” they noted.
Increased lending on farm operations comes amid increasing risk in the agriculture sector, as expectations for large supplies and trade disputes have contributed to sharp price declines in June for most major agricultural commodities, they added.
According to the "National Survey of Terms of Lending to Farmers," the total volume of non-real estate farm loans was nearly 2% higher than the same period last year.
After falling to five-year lows in 2017, the volume of farm loans grew leading into 2018 and has continued to increase in the second quarter, according to the report.
“Adjusted for inflation, livestock loans reached a historical high for the second quarter, while the volume of farm machinery and equipment loans has narrowed to the lowest second-quarter level since 2015,” the report pointed out.
Farm debt weighs on ag bank liquidity
The Fed also reported that outstanding farm debt continued to increase in the first quarter. Similar to previous quarters, the increase primarily was driven by additional increases in real estate debt, the report authors noted.
“Although the pace of growth in real estate debt has slowed somewhat from previous years, outstanding loans for farm real estate still were up 5% from the previous year. Non-real estate debt also continued to grow, but at a slower pace of about 1%,” they wrote.
That growing farm debt has also continued to weigh on liquidity at agricultural banks, Crowley and Kretiman said.
According to the report, loan-to-deposit ratios at agricultural banks have increased 10% since the first quarter of 2013, indicating a modest reduction in available funds. Despite a slight increase in the fourth quarter of 2017, liquidity decreased slightly in the first quarter of 2018, and the loan-to-deposit ratio remained near 80%.
“If farm debt continues to increase while agricultural commodity prices and incomes remain subdued, liquidity may remain tight in the coming months,” the report said.