FarmPolicy

September 27, 2016

Lackluster Farm Economy Could Impact Lenders

Reuters writer P.J. Huffstutter reported today that, “Leading U.S. agricultural lenders, including some commercial banks and the Farm Credit System (FCS), could be impacted by the souring farm economy, in part because growth in their loan portfolios in recent years has been heavily rooted in farmland appreciation, a report released on Tuesday by Fitch Ratings said.

“But while such institutions could see the quality of some of their assets deteriorate, the relative strength of the current Farm Credit System and a less volatile interest rate should ease any adverse impact on lenders, Bain Rumohr, director of Fitch Ratings, told Reuters.”

The article explained that, “While there are some parallels between this farm downturn and the agricultural crisis of the 1980s, the differences are significant enough that the result on the U.S. lending sector should be more benign, the report said.

“As a result, Fitch doesn’t expect the sector’s worsening conditions to affect the ratings of FCS or the individual banks in the system.”

Ms. Huffstutter added that, “Economic erosion continued to squeeze Midwest farmers’ capital expenditures and pressure farmland values and cash rents in the first quarter of 2016, according to quarterly reports on the agricultural economy released last week by the Federal Reserve Banks in St. Louis, Kansas City and Chicago. Repayment rates for non-real estate farm loans also continued to sour.”

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Federal Reserve Reports- Farmland Values- and Cash Rents- Decline

Wall Street Journal writer Jesse Newman reported last week that, “Real farmland values in parts of the Midwest fell at their fastest clip in almost 30 years during the first quarter, according to a regional Federal Reserve report on Thursday.

“Falling crop prices have weighed on land values from Kansas to Indiana over the past two years as farm income declined and investors who had piled into the asset at the start of the decade retrenched.

Three regional Federal Reserve banks all reported year-over-year declines in farmland values in their districts and said the drops would continue, though their forecasts were based on surveys taken before the recent rally in corn and soybean prices.”

Ms. Newman explained that, “The St. Louis Fed region that includes parts of the U.S. agricultural heartland in Illinois, Indiana and Missouri reported the steepest decline, with the average price of ‘quality’ farmland falling 6.4% in the quarter, the biggest decline since its survey began in 2012 [see related graph below].

The Chicago Fed said prices for similar land in its district fell 4% from a year ago, the seventh successive quarterly decline. Adjusted for inflation, prices in an area that includes parts of Illinois, Indiana, Iowa, Michigan and Wisconsin fell 5%, the biggest quarterly drop since 1987.

“Declines in the Kansas City Fed’s district, which includes Kansas and Nebraska, were less pronounced, but the bank said prices for nonirrigated cropland fell 4% in the quarter [see related graph below].”

The Journal article added that, “The drop in land values has been accompanied by deteriorating credit conditions, with more loans taken out to cover farm operations even as repayment rates fell on existing debt.”

Christopher Doering reported in Saturday’s Des Moines Register that, “Iowa was among the hardest hit states. Farmland prices as of April 1 dropped 5 percent compared with a year earlier, bringing the string of year-over-year declines in Iowa’s farmland to 10 quarters. During the first three months of 2016, land prices in Iowa declined 1 percent.

The decline is forecast to continue. David Oppedahl, senior business economist at the Chicago Fed, said nearly two-thirds of the 200 agricultural bankers surveyed expect values to drop in the second quarter, with the rest predicting them to remain stable.”

Cash Rents

With respect to cash rents (see additional background here and here), the St. Louis Fed noted that, “Table 2 indicates that cash rents for quality farmland and ranchland or pastureland also fell in the first quarter of 2016 compared with a year earlier. After falling by 9.5 percent in the fourth quarter of 2015, cash rents on quality farmland fell by an additional 7.5 percent in the first quarter (relative to a year earlier).”

The Chicago District noted that, “In 2016, the index of inflation-adjusted farmland cash rental rates was down more than the index of inflation- adjusted agricultural land values (see chart 2). Indeed, 2016’s real cash rental rates were 13 percent below their level in 1981, whereas real farmland values were still 38 percent above their 1981 level. Given the decrease in cash rental rates was larger than that in farmland values, the spread between their respective indexes widened for the seventh year in a row. This widening gap reflected relatively stronger demand to own farmland than to lease it, as land values did not fall as much as the earnings potential of farmland (represented by cash rental rates). Greater uncertainty about the profitability of crop production likely held down bids by farmers to rent farmland on a cash basis; there were reports of some farms coming up for lease again this year after initial rental arrangements fell through. Not surprisingly, the declines in crop prices of recent years seemed to lower farmers’ expectations for turning a profit on leased acres in 2016.”

And the Kansas City Fed stated that, “Although most costs associated with agricultural production have held firm, cash rents declined for all farmland types. After remaining positive through most of 2015, ranchland cash rents dropped in the first quarter, declining 10 percent from a year earlier (Chart 9).”

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U.S. Crop Prices Surge After Government Report

Christopher Doering reported in today’s Des Moines Register that, “Farmers in Iowa and across the Corn Belt struggling to reach profitability this year got some good news from the U.S. Department of Agriculture on Tuesday.

The USDA said producers are expected to grow a record 14.43 billion bushels of corn, and 3.8 billion bushes of soybeans, which would be the third best crop ever. While the bumper crops are likely to cap the possibility of a large rebound in prices anytime soon, the federal government surprised the market by increasing its estimates for feed usage and exports. Corn and soybean prices soared following the prospect of higher-than-expected demand.”

Mr. Doering added that, “USDA forecast average farm prices for corn and soybeans at $3.35 and $9.10 a bushel, respectively, in 2016. A year ago, cash prices for corn were $3.60 and soybeans $8.85. Iowa was the nation’s biggest producer of both crops in 2015.”

Today’s article noted that, “A prolonged slump in commodity prices has squeezed farm income, forcing some producers to cut spending or turn to their banks for help. Farm income this year is forecast to fall to $54.8 billion, its lowest level since 2002 and down 56 percent from the high of $123.3 billion just three years ago, according to the USDA.”

Jesse Newman reported in today’s Wall Street Journal that, “U.S. crop prices surged Tuesday, extending an unexpected run in agricultural prices that has drawn in big investors like hedge funds.

The gains promise much needed relief for a farm economy battered by the slump in prices for major row crops over the past three years.

“At the same time, they could mean higher prices for consumers going into the summer.”

Ms. Newman explained that, “The catalyst was a closely watched government report that said rising exports would eat into the glut in farm commodities by next year. The big surprise was a projection that U.S. soybean inventories would fall by a steep 24%.”

Corn futures rose 3.3% to $3.81 a bushel,” the Journal article said.

And Reuters writer Mark Weinraub reported yesterday that, “May 10 World and U.S. soybean supplies will be tighter than expected for the next two years due to reduced harvests in South America and rising global demand, the U.S. Agriculture Department said on Tuesday.

“The report jolted the soy market, with the most active Chicago Board of Trade futures soybean contract surging 4.5 percent and hitting its highest since August 2014. Soymeal futures rallied to a 16-1/2-month peak.”

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Iowa State University Survey- Cash Rents Down Slightly

A recent survey from Iowa State University (ISU) Extension indicated that cash rents in Iowa have decreased slightly in 2016.

More specifically, the ISU publication included the following table and map:

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Prices Received Improve, Slightly

USDA’s National Agricultural Statistics Service (NASS) indicated last month in its April Agricultural Prices report that, “The corn price, at $3.57 per bushel, is unchanged from last month but is down 24 cents from March 2015.”

The NASS update added that, “The soybean price, at $8.56 per bushel, increased 5 cents from February but is $1.29 below March a year earlier.”

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House Ag Subcommittee: Growing Farm Financial Pressure

Recall that recent news items regarding the agricultural economy have included phrases like, “Mounting Pressure,” and “There Definitely Could be Some Pain;” while the Federal Reserve Board indicated in its most recent Beige Book report that, “Some crop input prices, such as fertilizer and diesel prices, moderated from year-ago levels, but profit margins were expected to remain relatively weak due to suppressed commodity prices.”

The Fed added that, “A contact in eastern Montana reported that less- profitable farms were leaving the business, and more exits were expected.”

Yesterday, the House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management held a hearing on the “growing financial pressures faced by U.S. farmers and ranchers. ”

A Subcommittee news release yesterday indicated that, “Conditions in farm country today contrast sharply with those during the formulation of the 2014 Farm Bill. While high prices for many farm commodities led to tremendous growth in net farm income through 2013, many of those prices have spiraled downward over the past three years. Witnesses spoke broadly about the factors that are driving current market conditions, the bleak outlook going forward, and the impact that both are having and could continue to have on our nation’s farmers and ranchers going forward. They also spoke to the vital role that farm policy and crop insurance are playing in helping absorb some of the shock, and they stressed the devastating impact that further reductions to these vital tools could have.”

Subcommittee Chairman Rick Crawford (R., Ark.) stated that, “Next year, we will head into a new Congress, and we will write a new Farm Bill. As we head into that long and difficult process, I hope our colleagues who are less directly involved in agriculture or farm policy will reflect on just how critically important farm policy is in responding to a crisis that can happen overnight.”

USDA Chief Economist Dr. Rob Johansson indicated at yesterday’s hearing that, “A strong dollar coupled with high-levels of global agricultural production leave U.S. producers facing commodity prices that continue to decline from record levels and a more difficult trading environment than last year. As a result there will be growing financial pressures on some producers this year, as expected revenue may not be sufficient to cover expected costs. Overall, USDA forecasts that net cash income will fall again in 2016.”

And Texas A&M agricultural economist Joe Outlaw pointed out yesterday that, “Cash rents have come down a little, but nowhere near the amount that commodity prices and returns have fallen. This is due in-part because some producers have multi-year lease agreements. However several cash lease tenants reported their landlord’s have been unwilling to lower cash lease rates.”

Dr. Outlaw added that, “[T]the current poor situation on farms across this country would be considerably worse if not for the safety net provided by both Title I commodity policies and federal crop insurance. There are some in agriculture who say that commodity policies are more important than crop insurance or vice versa. I believe they are equally important – especially during times of low prices. For example, lenders tend to view crop insurance as being more important because the insurance guarantee is ‘bankable,” meaning it is something on which they can base a loan. On the other hand, producers see the commodity assistance as the only chance they have of coming close to breaking even in a low price environment.

“And finally, in my opinion, the interest groups that continue to call for changes that would negatively impact these two key policy tools clearly either have no idea how difficult the financial situation is across agriculture or they simply do not care. Farmers in this country deserve better than to continually be threatened with changes that I consider a dismantling of the safety net.”

With respect to the price outlook for 2016, University of Illinois agricultural economists Scott Irwin and Darrel Good indicated recently at farmdoc daily (“Forming Corn and Soybean Price Expectations for 2016-17“) that, “Using new ending-stocks-to-use pricing models (farmdoc daily, April 6, 2016), we conclude that the probability of the 2016-17 marketing year average farm price of corn and soybeans to be below $3.40 and $9.00, respectively, appears to be quite low at this time. For perspective, substantially lower prices would require a demand environment even weaker than occurred during the Great Recession of 2008-09. A more interesting question revolves around the conditions required to increase the average price to levels that would be considered profitable for most producers. If overall demand remains weak, prospects of very small year ending stocks would likely be required to move averages above $4.00 and $10.00 for corn and soybeans, respectively, which would be helpful but would not represent a return to general profitability. However, there are factors that could improve the demand environment in the year ahead. These include crop production problems in other parts of the world that would extend the demand for U.S. corn and soybeans, a realignment of currency exchange rates that would favor U.S. corn and soybean exports, and policies that enhance the domestic demand for corn and soybeans. Recent dryness that poses, or may pose, some threat to the Malaysian palm oil crop and the second-season Brazilian corn crop are examples of production problems that would enhance export demand. The current biofuels policy that is supporting biodiesel production also has the potential to support soybean oil consumption at a higher level. It is interesting that the futures markets may already be anticipating some of these developments, as the markets are currently projecting 2016-17 marketing year average prices of about $3.70 for corn and $9.40 for soybeans.”

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Federal Reserve Beige Book: Observations on the Ag Economy- April ’16

Today, the Federal Reserve Board released its Summary of Commentary on Current Economic Conditions. Commonly referred to as the “Beige Book,” the report included the following observations with respect to the U.S. agricultural economy:

* Fifth District- Richmond– “Several District farmers reported that they have made limited capital purchases in recent weeks and project little change for the next six months. According to agribusiness contacts, input prices varied since the previous report. Chemical prices grew modestly while fertilizer prices decreased slightly and seed prices remained elevated. Crop prices stabilized on balance.”

* Sixth District- Atlanta– “Agricultural conditions were mixed, while most of the District remained drought free, there were some areas in Florida, Georgia, and Louisiana categorized as abnormally dry. Due to excessive rain and flooding earlier in the year, the USDA designated several counties in central and southern Florida as primary natural disaster areas. Florida’s orange crop forecast increased from the previous month but continued to be lower than last season. On a year-over-year basis, monthly prices paid to farmers for corn, cotton, rice, soybeans, beef, broilers, and eggs have declined.”

* Seventh District- Chicago– “Spring arrived early in much of the District, allowing fieldwork to begin. Corn, soybean, and wheat prices moved up, and fertilizer prices and land rents moved down. However, these changes were not large enough to appreciably improve crop farmers’ earnings prospects. Cattle prices edged higher, while hog and dairy prices were somewhat lower. The drop in dairy prices was large enough that many operations now face losses unless they had made forward contracts at higher prices.”

* Eighth District – St. Louis– “Still facing low crop prices, farmers plan to increase acreage to cover as much of their fixed costs as they can. District corn, cotton, rice, and soybeans acreage is expected to be higher last year. Concerns about December flooding impacting the winter wheat crop have been unfounded so far, as more than 93 percent of the crop is rated fair or better.”

* Ninth District- Minneapolis– “District agricultural conditions remained weak. A contact in eastern Montana reported that less- profitable farms were leaving the business, and more exits were expected. Reports indicated that District farmers intended to plant fewer acres of wheat but more acres of corn in 2016 compared with last year, and an early forecast pointed to a strong growing season in parts of the District this year. Logging in northern Wisconsin was slowed by a warm winter that made the ground too soft for equipment. Farm prices fell in February from a year earlier for corn, wheat, soybeans, hay, hogs, cattle, chickens, eggs, and milk; prices for turkeys increased from a year earlier.”

* Tenth District- Kansas City– “The District farm economy remained subdued since the previous reporting period, though crop prices improved slightly and growing conditions were mostly positive. Crop prices increased moderately in March, but were generally below previous-year levels. Some crop input prices, such as fertilizer and diesel prices, moderated from year-ago levels, but profit margins were expected to remain relatively weak due to suppressed commodity prices. Growing conditions for winter wheat in Oklahoma and Kansas were primarily rated between fair and good, but conditions deteriorated slightly from the previous month due to somewhat warmer weather and relatively little precipitation. Despite a brief rebound in March, livestock prices were significantly lower than a year ago, and profit margins at cattle feedlots remained soft, as livestock prices have decreased more than input costs over the past year.”

* Eleventh District- Dallas– “Row-crop farmers were busy preparing fields or planting, and the USDA Prospective Plantings report showed acreage increases in Texas for cotton, corn and soybeans this year versus 2015, and acreage declines for sorghum and wheat. Production prospects for 2016 crops are quite positive in light of healthy soil moisture and a favorable weather outlook. While crop prices generally increased slightly over the past six weeks, they remained low and contacts continued to mention stressful financial situations among many producers in the region. On the cattle side, prices increased over the reporting period, largely seasonally, and beef production was higher than a year ago.”

* Twelfth District- San Francisco– “Activity in the agriculture sector picked up over the reporting period. Growing conditions in California and other parts of the District have been bolstered by ample winter rainfall that has partially alleviated the challenges created by sustained drought. A seasonal improvement in domestic demand for timber products somewhat offset weaker foreign demand. However, contacts reported that the elevated dollar continued to weigh down exports for most products. Domestic sales of produce strengthened. Despite weak exports, herd costs fell, reducing losses in that sector. Contacts reported that capital spending plans were focused on productivity enhancements and replacing equipment rather than capacity expansion.”

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Ag Economy: “There Definitely Could be Some Pain”

Gregory Meyer reported today at The Financial Times Online that, “US corn bins are well stocked, grain markets are in a funk and economists warn of struggles ahead for farmers.

“But Kent Kleinschmidt of central Illinois intends to sow corn on half his 1,200-acre farm this spring, same as always. ‘It’s not like anybody’s in panic mode,’ he says.

“His sangfroid is common among farmers in the Midwest, and bodes bearishly for the world’s most widely grown grain. US farmers in 2016 have indicated plans to plant the third most corn on record despite low prices.”

The FT article noted that, “The approaching caravan of tractors repeats a dynamic seen across commodities markets. Despite a collapse in prices, miners, oil companies and farmers have been slow to restrain output, prolonging their pain.

“When corn doubled between 2006-12, topping $8 a bushel at their peak, farmers banked cash. Prices are now about $3.50.

“‘At the end of this year, the financial reserves built up in that profitable period will be pretty much gone. Then we’ll being facing some really tough decisions,’ says Gary Schnitkey, a professor of farm management at the University of Illinois.”

With respect to production costs, Mr. Meyer pointed out that, “In Minnesota, total expenses for growing corn dropped 8 per cent between 2013-15 to about $750 per acre, according to the Center for Farm Financial Management at the University of Minnesota. On highly productive acreage in central Illinois, total non-land costs for corn will be $550 per acre this year, down from $615 in 2013, according to Prof Schnitkey.”

Today’s article also stated that, “Stephen Gabriel, chief economist at the Farm Credit Administration, which oversees the credit system, says farm lending institutions remained ‘very well capitalised.’

“For farmers, ‘input prices will drop; they’ll start working more efficiently.’ Mr Gabriel says. ‘But in the meantime there definitely could be some pain. We’re expecting to see some credit issues arise over the next few years in the grain sector in the Midwest.'”

Mr. Meyer also pointed out that, “Farmers are planting corn amid a darkening financial picture. In central Illinois, home to some of the best soil on earth, Prof Schnitkey forecast a net loss after land costs of $36 per acre from corn this year with corn prices higher than they are today.”

Meanwhile, Jacob Bunge, in an article today at The Wall Street Journal Online, quoted Cargill chairman and CEO David MacLennan as saying, “Barring weather events, we don’t anticipate a near-term improvement in market conditions for agriculture.”

The Journal article pointed out that, “A global surplus of major crops has kept prices low, pushing U.S. farmers’ incomes to the lowest level in more than a decade and forcing them to scrutinize spending on seeds, sprays and tractors, which is posing a challenge for Farm Belt mainstays like DuPont Co., Monsanto Co. and Deere & Co.”

Wal-Mart: Cage Free Eggs by 2025

Bloomberg writer Nick Turner reported yesterday that, “Wal-Mart Stores Inc., the world’s largest retail chain, will sell 100 percent cage-free eggs in the U.S. by 2025, joining an industrywide shift toward a practice that’s seen as more humane.

“As part of the transition, Wal-Mart and its Sam’s Club warehouse chain will require that its egg suppliers adopt United Egg Producers rules or an equivalent set of standards, the retailer said in a statement Tuesday. Compliance will be checked annually by a third party.

Wal-Mart sells more groceries than anyone else in the U.S., and its decisions typically sway the rest of the industry. The Bentonville, Arkansas-based company has offered cage-free eggs since 2001, though not exclusively.”

Mr. Turner noted that, “The challenge for Wal-Mart is transitioning to cage-free eggs while keeping a lid on prices, something the chain said it can do with the 2025 deadline.”

Recall that other livestock producers are also increasingly listening to consumer demands when it comes to how animal protein is manufactured.

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Ag Economy: “Financial Stress is Building”

DTN special correspondent Elizabeth Williams reported this week that, “Cautious — that’s what the farmland brokers and rural appraisers termed their mood last week at the spring meeting of the Iowa Realtors Land Institute. It may look like business as usual as planting begins, but beneath the surface, financial stress is building in farm country, Iowa Concern Hotline director Margaret Van Ginkel with Iowa State Extension would add.

“The hotline, established in 1985 during the farm financial crisis, has seen an increase in call volume this spring. ‘Questions concerning tax consequences of selling machinery or land, what if they stop making payments on machinery, worries about whether a farm operation can support two or three generations. The vulnerability is there,’ Van Ginkel said.”

The DTN article explained that, “Iowa is a bellwether state for agricultural stress, given its rapid run-up in farm incomes, land values and cash rents during corn’s 2008-12 glory years. Some lenders think the commodity fall will be harder here. One sign is that Land Institute members think the state’s farmland prices tumbled 5% on average over the last six months, according to its March 1 survey. Since 2015, Iowa land values have fallen 8.7% across the state with top-quality cropland decreasing from $9,516 per acre to $9,146, the survey found.”

Ms. Williams also noted that, “Cash rents have softened a little, Iowa farm managers and rural appraisers reported at their statewide meeting, but rents are still strong in some areas. Waverly banker Willemssen said cash rents in northeast Iowa are still in the $300- to $400-per-acre range.”

Meanwhile, a news release from North Dakota State University this week stated that, “North Dakota land values declined for the second consecutive year in 2015. This follows an 11-year period (2003 to 2014) in which cropland values averaged an annual increase of 15 percent, the strongest sustained run-up in cropland values in the past 100 years.”

The release added that, “Based on the survey, North Dakota average cropland values declined about 4 percent during 2015. Swenson noted that a report by the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers indicated a greater decline, 9 percent, for 2015.”

With respect to the implications of the tightening financial outlook, Reuters writers Tom Polansek and Karl Plume reported this week that, “North Dakota farmer Randy Thompson plans to apply 30 percent less nitrogen fertilizer to his corn this year to save money in the face of crashing crop prices.

“In Minnesota, Andy Pulk is trucking crop nutrients to his farm from 350 miles (563.3 km) away because he found a better price than his local cooperative could offer. He has also halted purchases of machinery.”

The article noted that, “With more acres than ever before likely to be planted with soybeans and corn in the U.S. Midwest this year, companies including seed maker Monsanto Co and fertilizer seller CF Industries Holdings might have expected a windfall for earnings.

“But with grain prices near five-year lows and farm incomes at their lowest levels since 2002, growers are tightening their belts by reducing spending on everything from fertilizer to seeds to chemicals.”

And, Jacob Bunge and Lisa Beilfuss reported today at The Wall Street Journal Online that, “Monsanto said profit tumbled in its latest quarter as the St. Louis-based maker of Roundup weed killer continues to grapple with an unfavorable agricultural market.

“The company is struggling with a sharp downturn in the U.S. farm economy and pressures in overseas markets. U.S. farmers’ incomes are projected to fall to their lowest level since 2002 after grain and oilseed prices sagged for three straight years due to a string of bumper harvests. The strength of the U.S. dollar has meanwhile made Monsanto’s products more expensive overseas.”

The Journal writers pointed out that, “In its latest quarter, Monsanto’s revenue from seeds and genomics, its biggest business, fell 8.6% as sales of most seed types declined. Sales in its agricultural productivity segment slid 30% to $715 million.”

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U.S. Ag Economy: “Mounting Pressure”

Nathan Kauffman, the Assistant Vice President and Omaha Branch Executive at the Federal Reserve Bank of Kansas City, indicated in a recent article (“Mounting Pressure in the U.S. Farm Sector“) that, “U.S. farm income has continued to decline, and is expected to remain low as planting season approaches across the country. The USDA projects real net farm income to be slightly less than a year ago; that projection would mark the second-lowest farm income total in more than 30 years (Chart 1). Prolonged weakness in the farm sector primarily has been driven by several consecutive years of low crop prices and persistently elevated input costs, while recent weakness in the livestock sector also has been a factor.”

Chart 1

The Fed update pointed out that, “The need for financing, and the potential for future financial stress, has continued to increase throughout U.S. farm country. Loan demand in the Tenth District is expected to increase again in the first quarter of 2016, which would be the third consecutive year in which lending needs in the farm sector increased relative to the previous year (Chart 3). Similarly, bankers responding to the fourth quarter survey indicated they expect loan renewals and extensions to continue to accelerate. Conversely, the rate at which loans are repaid at agricultural banks in the District was expected to soften further.

“Persistently strong loan demand at agricultural banks has been coupled with reports of increasing use of USDA Farm Loan Programs through the Farm Service Agency (FSA). From 2013 to 2015, FSA loan volumes increased more than 40 percent (Chart 4).”

Chart 4

The Fed update also noted that, “Despite strong loan demand and an increase in the federal funds target rate in December, interest rates on most farm loans have remained historically low. In fact, interest expenses for U.S. corn producers accounted for only 9 cents per bushel of production in 2014, the latest year for which data are currently available.”

Meanwhile, a recent update by Kevin Patrick, Ryan Kuhns, and Allison Borchers at Choices Online (“Recent Trends in U.S. Farm Income, Wealth, and Financial Health“) stated that, “The continued drop in farm sector income is expected to place downward pressure on farm asset values, which had appreciated during the previous several years. The resulting drop in liquidity from multiple years of lower income is also expected to increase the need for sector borrowing relative to the 2009-2013 period. As a result, the USDA predicts a decline in sector equity and an increase in leverage, which signals the potential building of financial stress within the farm sector. A portion of U.S. farm businesses are highly leveraged and are at increased risk of default. While measures of financial health are worsening relative to the profitable 2009-2013 period, they remain better than historic averages.”

And Rick Barrett reported in yesterday’s Milwaukee Journal Sentinel that, “Carrie Mess, like most dairy farmers, is losing money every time the cows are milked on her farm near Watertown.

“As farmers gear up for spring planting, those who sell crops on the commodities markets stand to lose buckets of money from low prices that are beyond their control.

“Simply put, what many farmers are paid for milk, grain or livestock now isn’t enough to cover their expenses. They’re taking out loans and tapping savings to remain in business, going to work every day knowing that it’s costing them money.”

With respect to other potential impacts of a slumping U.S. ag economy, the AP reported today that, “Kansas farm co-ops are feeling pressure to merge as shrinking farm incomes have producers looking for ways to cut their costs.

“In about six weeks, Farmers Cooperative Elevator in Garden Plain will vote on whether to merge with co-ops in Anthony and Kiowa. Andale Farmers Co-op voted in December to merge with Kanza Co-op, a large operation based in the Pratt County town of Iuka.”

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#KingCorn- Prospective Plantings for 2016

A news release yesterday from the USDA’s National Agricultural Statistics Service (NASS) stated that, “U.S. corn growers expect to plant 93.6 million acres to corn this year, according to the Prospective Plantings report released today by [NASS]. This is the first increase in corn planted acreage since 2012 and, if realized, will be the third largest corn acreage since 1944.

Driven by the expectations of higher returns in 2016 compared with other crops, corn growers in 41 of the 48 contiguous states expect to either maintain or increase the number of acres they plant to corn. Growers in Illinois, Iowa, Kansas, and North Dakota expect to increase their corn acreage by 400,000 or more acres in 2016.

“In contrast, U.S. soybean growers expect to reverse the recent trends, which saw several record-high years. In 2016, growers expect to plant 82.2 million acres to soybeans, a less than one percent decrease from 2015.”

Jesse Newman reported yesterday at The Wall Street Journal Online that, “Struggling U.S. farmers plan this year to sow their fields with extra corn in a high-stakes gamble to counter sliding prices by selling even more of the grain…Many domestic farmers are grappling with the fallout from three years of declining crop prices and trying to grow their way out of the industry’s slump, even as farm income is expected to drop for a third year, with the forecast $54.8 billion less than half the record in 2013.”

The Journal article noted that, “Corn prices tumbled to a nearly three-month low, dropping 4.2% to $3.51 ½ a bushel.”

Ms. Newman also pointed out that, “The agency’s quarterly report on U.S. grain inventory said corn stockpiles on March 1 totaled 7.81 billion bushels, up from 7.75 billion bushels on the same date last year, and the highest in nearly three decades.”

Christopher Doering reported in today’s Des Moines Register that, “Agriculture remains mired in a stubbornly long period of low commodity prices that has left some producers struggling to cover their costs and forced many to cut back on inputs such as seed and fertilizer to save money. Other farmers have restructured loans or refinanced them against other equity resources so they have enough cash to operate.”

Iowa State University agricultural economist Chad Hart noted yesterday that, “Given trend yields of 168 bushels per acre for corn and 46.7 bushels per acre for soybeans, the projected acreage points to another round of massive crops. Corn production would reach 14.38 billion bushels, which would be another record corn crop. Soybean production would approach 3.8 billion bushels, which would be the 3rd largest soybean crop in history. And for markets already dealing with large supplies, these prospective plantings do not help. So the markets will be looking for Mother Nature to slow the supply train down.”

University of Illinois agricultural economist Darrel Good spoke about the USDA reports in a radio interview yesterday:

And, Dr. Good and Scott Irwin, also of the University of Illinois, held a detailed webinar looking into the yesterday’s USDA reports this morning.

Meanwhile, the Associated Press reported yesterday that, “Inflation-adjusted farm incomes in Minnesota fell to their lowest point in 20 years in 2015 despite record crop yields and this year’s outlook is also grim, according to an annual analysis released Thursday.

“A major factor was the continued decline in commodity prices, the report from the Minnesota State Colleges and Universities system and University of Minnesota Extension said. Unlike 2014, when livestock producers had a very good year, both crop and livestock farms struggled last year.”

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Prices Received for Corn and Soybeans Down From Year Ago Levels

The USDA’s National Agricultural Statistics Service (NASS) released its monthly Agricultural Prices report yesterday, which noted that, “The corn price, at $3.57 per bushel, is down 9 cents from last month and 22 cents below February 2015.”

The NASS report added that, “The soybean price, at $8.51 per bushel, decreased 20 cents from January and $1.40 from February a year earlier.”

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Survey: Iowa Farm Land Values Decline

Donnelle Eller reported on the front page of the business section in today’s Des Moines Register that, “Iowa farmland values have dropped nearly 9 percent over the past year, reflecting lower farm income and commodity prices, a farm real estate group said Wednesday.

“The Iowa Realtors Land Institute farmland survey through March shows the average value of cropland fell to $6,732 an acre, 8.7 percent lower less than a year ago.”

Ms. Eller explained that, “It’s a 22.5 percent decline from 2013, when values climbed to a record $8,690 an acre and U.S. income climbed to $123 billion.”

The Register article noted that, “‘Farm incomes have been dropping, but land values haven’t dropped to the same degree,’ said Steve Bruere, president of Peoples Co., a Clive brokerage and farm management business.

“That has meant that farmland rents have been slow to decline, causing some farmers to default on agreements this spring.”

Ms. Eller added that, “In November, Iowa State University’s farmland survey showed values down 3.9 percent to $7,633 an acre.”

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Borrowing Costs- Cautious Tone on Interest Rate Hikes From Fed Chairwoman

As commodity prices falter and profit margins remain thin, U.S. agricultural producers will be eager to minimize costs of production in 2016.  News reports have indicated that some producers are already cutting back on spending for seed and fertilizer.

With respect to interest ratesBinyamin Applebaum reported in today’s New York Times that, “Janet L. Yellen, the Federal Reserve chairwoman, said on Tuesday that the United States economy remained on track despite a rough start to the year because the drag from weak growth in other countries was being offset by lower borrowing costs.

“Ms. Yellen told the Economic Club of New York that the economy ‘had proven remarkably resilient,’ and that the Fed expected better days ahead. She said the Fed still intended to pursue a careful, patient course toward higher interest rates as the economy improved.

“The cautious tone of her remarks, however, suggested no rate increase was likely at the Fed’s next meeting, in April, shifting the eyes of Fed watchers to its subsequent meeting in June.”

The Times article explained that, “The Fed’s policy-making committee indicated after its most recent meeting, this month, that it now expected to raise rates by about half a percentage point this year.

“That was half as much as the Fed had predicted at the beginning of the year.

“Ms. Yellen attributed the deceleration on Tuesday to a judgment by Fed officials that somewhat lower rates were necessary to maintain steady growth.”

And David Harrison and Michael S. Derby stated in today’s Wall Street Journal that, “Global economic and financial uncertainty poses risks to the U.S. economy and justifies a slower path of interest-rate increases, Federal Reserve Chairwoman Janet Yellen said in remarks that suggested little appetite to raise rates when officials meet next month.”

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Ahead of Government Estimates, Surveys Show More Corn and Soybeans Planted in 2016

Jesse Newman reported yesterday at The Wall Street Journal Online that, “U.S. farmers are expected to plant more corn and soybeans this year even as their storage bins remain stuffed with rising inventory, according to analysts surveyed by The Wall Street Journal.

“The U.S. Department of Agriculture on Thursday will release two closely watched reports on domestic crop stockpiles and farmers’ planting intentions, against a backdrop of historically high global supplies and pressure on U.S. exports caused in part by the strength of the U.S. dollar.”

Ms. Newman noted that, “Analysts expect USDA to estimate that farmers will plant 90.05 million acres of corn, up about 2% from nearly 88 million last year.

“The USDA likely will peg soybean acres at 82.95 million acres, up 0.4% from 82.65 million last year, while all-wheat acreage likely will be estimated at 51.66 million acres, down 5% from 54.64 million in 2015, according to the survey.”

With this background in mind, Bloomberg writer Alan Bjerga indicated yesterday that, “Illinois farmer David Erickson admits that what he and many U.S. farmers are about to do doesn’t seem to make much sense. With bulging stockpiles of corn and soybeans left over from last year’s harvest, they’re planting more in 2016 — even though the crops probably won’t be profitable.”

The Bloomberg article noted that, “After record prices in 2012 sparked a boom in output, corn and soybeans in the Midwest now fetch less than the cost to produce them, and U.S. farm income is headed for a 14-year low. While the market has improved in recent months, researcher AgResource Co. still estimates a $50 loss for every acre sown on average. As they seed more, growers have cut spending and hope better-than-normal yields will help them at least break even.

“Farmers in the U.S., the world’s biggest grower, will expand corn planting to 89.998 million acres, up 2.3 percent from a six-year low in 2015, and soybeans will be sown on 83.07 million acres, the second-most ever, a Bloomberg survey of 33 analysts showed. The U.S. Department of Agriculture will disclose its planting and stockpile estimates on Thursday.”

Mr. Bjerga added that, “With few appealing options, David Seil chose to expand corn planting on his 1,300-acre farm near Gowrie, Iowa. Rather than sacrifice productive land by using it as pasture for his cattle, he’s cutting back on spending for seed and fertilizer and hoping that weather damages crops somewhere else so that prices go up.”

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