ST. LOUIS ― Farm income continued to drop across the areas of the Midwest and the Midsouth during the fourth quarter of 2015 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis.
Meanwhile, the average value of quality farmland, as well as ranchland and pastureland, also declined. The survey for the report was conducted from Dec. 15-Dec. 31, 2015. The results were based on the responses of 33 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Midsouth states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Farm Income, Expenditures Fall
During the fourth quarter, bankers reported a continued drop in farm income compared with the same period a year ago. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher income compared with the same quarter a year earlier; results lower than 100 indicate lower income), the farm income index value was 28. This was the sixth consecutive quarter that this value fell below 100, and the lowest level recorded since the survey began in 2012. Looking ahead at the first quarter of 2016, an even greater percentage of bankers indicated they expect income to continue to decline.
Amid the ongoing downturn in farm income, farmers and ranchers continued to scale back spending in the fourth quarter of 2015. Values for the index for household spending and the index for farm capital equipment expenditures again fell to their lowest levels since the survey began in 2012. Bankers expect expenditures in both categories to continue to decline in early 2016.
“Crop and cattle prices are down, but input costs are rising at a slower pace, a Kentucky lender said. “I expect capital expenditures to decrease along with devaluation in farm real estate.”
Quality Farmland, Ranchland and Pastureland Values Fall
During the fourth quarter of 2015, bankers reported that quality farmland values fell slightly, down 2.5 percent compared with this period the previous year. Ranchland or pastureland values also fell during the fourth quarter, down 5.3 percent compared with a year earlier and the largest decline since the second quarter of 2014. A majority of the bankers surveyed said they expect both quality farmland and ranchland or pastureland prices to continue to decline in 2016.
Meanwhile, cash rents for quality farmland plummeted while rents for ranchland or pastureland rose. Cash rents for quality farmland fell 9.5 percent in the fourth quarter of 2015 compared with a year earlier. In contrast, cash rents for ranchland or pastureland rose 8.6 percent during this period. Looking ahead for the first quarter of 2016, bankers said they expect that cash rents will decline for both quality farmland and pastureland or ranchland.
Special Questions about Farmland Returns and Sales
In response to the a special question regarding farmland returns in 2016, 77 percent of the lenders reported they expect a slightly positive return on farmland for landowners in their regions of up to 5 percent. Farmland returns are defined as rents less expenses, divided by the market value of the land. In comparison, 13 percent of lenders expect slightly higher returns of between 5 and 10 percent, while 10 percent of lenders expect landowners in their regions to face negative returns.
The second question asked agricultural bankers about their expectations regarding the volume of land sales in 2016 relative to 2015. Close to 50 percent reported they did not expect any change in sales volume, while 31 percent expect sales volume to increase, and 22 percent of lenders reported they expect to see a lower volume of land sales.
In response to the final question regarding how much of the farmland sold in 2015 was purchased by farmers, 72 percent of the lenders said farmers were the buyers of more than 50 percent of the farmland in their regions.