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Drought Driving Incomes Lower, Boosting Lending

Demand for operating loans has been strong in the third quarter, largely due to higher feed and fuel prices in the wake of the drought, according to the Kansas City Federal Reserve.

Jason Henderson, Omaha branch executive and Nathan Kauffman, KC Fed economist say loan extensions and renewals were also up in the third quarter, and loan repayment rates dipped. Bankers also expect declines in capital spending to continue, report authors say.

No surprise, livestock farmers are seeking loans due to hard-hit pastures and higher grain costs. Cattle feedlots and hog operations saw deep cuts in expected income. Approximately 40% of bankers indicated that the drought "led to higher operating loan demand for cow/calf operations," and 30% of bankers reported higher operating loan demand for cattle feedlots, the report notes.

Despite banker's expectations, crop incomes did fall below 2011 highs because of increasing fuel costs and reduced yields. However, Henderson and Kauffman note that wheat operations fared better, citing a rebound in wheat production and prices.

Farmland remains a hot commodity, as supply is much lower than demand. Bankers reported that marginal crop land was selling well in some areas, though overall gains in cropland values were slowing.

Land values were above 2011 levels, with irrigated land rising 25% above year ago levels and ranchland gaining 14%.

Interest rates, Henderson and Kauffman say, posted new record lows in Q3 for both real estate and non-real estate tracts.

Residual effects of the drought are likely – bankers in the district reported herd liquidations and expect more if grain inventories remain low. Subsoil moisture levels are also very low, and winter wheat condition going into dormancy was less than ideal.

Read the full report by clicking here.