Agricultural credit conditions in the Federal Reserve Banks of Kansas City district continue to deteriorate at a gradual pace. According to responses from its survey of ag banker finds farm income in the region was sharply lower, loan repayment was slightly slower and problem loan rates grew slightly during the third quarter. Loan demand increased as working capital declined and lenders report an increase in asset liquidation. Despite the moderation in credit conditions and interest rates remaining at multi-decade highs, farm real estate values remain firm.
The outlook for the farm sector nearing the end of 2024 remains subdued alongside weak crop prices. Farm income and credit conditions continue to weaken more in areas most concentrated in crop production while the strength of cattle prices provides support to other portions of the region. The considerable reduction in profits for crop producers weakens farm balance sheets, increases demand for financing and could put further pressure on agricultural credit conditions in the months ahead.
The pace of decline in farm income intensified in the third quarter as crop prices remained weak. About 60% of respondents report farm income was lower than a year ago and only 10% report an increase -- the lowest share since 2020. Despite strong cattle prices, incomes in the region have contracted alongside sharply lower crop prices.
According to respondents, incomes weakened the most in Kansas, Missouri and Nebraska. Oklahoma saw mostly stable conditions, with 30% of lenders reporting incomes that were lower than a year ago and another 30% reporting that incomes were higher.
As farm finances softened further, the pace of decline in loan repayment rates picked up gradually. About 25% of respondents report farm loan repayment rates were lower than a year ago and less than 5% report an increase. Looking ahead to the next three months, nearly 40% expect rates of repayment to decline.
Alongside tighter repayment capacity, loan quality weakened slightly across the region. On average, about 6% and 3% of responding banks’ loan portfolios were on the watch and classified lists, respectively. Lenders in nearly all states report a slight increase in problem loan rates following historically strong loan quality in recent years.
Asset liquidation also increased notably from recent years. About 60% of responding banks report at least a fraction of farm borrowers planned to sell assets in the coming months to improve working capital or make loan payments. About a fifth report more than 10% of borrowers had liquidation plans.
Despite fewer opportunities for profits in the crop sector, agricultural real estate values held firm in the third quarter. The value of nonirrigated cropland was 5% higher than one year ago. Irrigated cropland and ranchland values also increased from a year ago but at a more modest pace of 0.3% and 1.6%, respectively. Cash rents on irrigated and nonirrigated cropland were nearly unchanged from a year earlier, while rents on ranchland increased about 4% and have been more volatile in recent periods.