Joe Mahon, Director, Regional Outreach Federal Reserve Bank of Minneapolis

After turning south in 2023, agricultural producers in the Ninth District saw their earnings decline further through the middle of 2024, according to results from the Federal Reserve Bank of Minneapolis’ second-quarter agricultural credit conditions survey.

Farm incomes decreased broadly from April through June relative to a year earlier, according to the survey, which was conducted during July. Spending on capital equipment also dropped, while farm household purchases increased.

Even as interest rates ticked up, falling incomes boosted loan demand, while the rate of loan repayment dipped slightly, and renewal and extension activity rose. Farmland values rose further, while cash rents also increased. Survey respondents predicted the third quarter will bring further declines in income, though they expect overall financial conditions to hold up better.

“Continued high input costs with lower commodity prices will result in decreased liquidity in many operations,” said a Minnesota banker. Many of their peers agreed, as 85 percent of lenders reported that borrower liquidity had decreased in the past three months from the same period a year earlier.

Farm incomes and spending also decreased due to weaker crop prices. More than 75 percent of district lenders surveyed reported that farm incomes decreased in the second quarter of 2024 from the same period in 2023, compared with only 11 percent who reported increased incomes. Nearly half reported that capital spending decreased. In contrast, spending by farm households increased on balance, as 40 percent of survey respondents saw an increase compared with 15 percent who reported decreases.

Owing to a prolonged decline in incomes and elevated operating costs, demand for credit increased in the second quarter, according to lenders. Nearly half of respondents indicated that loan demand increased relative to a year earlier, compared with 1 in 5 who reported lower demand. Collateral requirements were unchanged according to a strong majority of lenders surveyed—87 percent—though the remainder reported that they increased. Average fixed and variable rates on operating, machinery, and real estate loans all increased slightly in the second quarter.

“We have completed our renewal season and for the most part our customers had a good year,” commented a South Dakota lender. Loan renewals generally increased across the district, while the rate of repayment on agricultural loans decreased on balance, reflecting overall stability in farm finances. Nearly a third of lenders stated that the number of renewals increased from a year ago, with almost all of the remainder reporting that renewal activity was unchanged. About 1 in 5 respondents reported that the rate of loan repayment fell from a year earlier, while only 5 percent said that repayment rates increased. None of the bankers responding to the survey reported having refused a loan due to a shortage of funds.

Continuing a four-year trend, land values and cash rents grew further in the second quarter. Ninth District nonirrigated cropland values increased by 3 percent on average from the second quarter of 2023. Irrigated cropland values rose by more than 13 percent from a year earlier, while ranch- and pastureland values increased to just under 13 percent. The district average cash rent for nonirrigated land jumped by less than 1 percent from a year ago. Ranchland rents increased by 11 percent, while cash rents for irrigated land fell by almost 3 percent. Changes in land values and rents were somewhat mixed across district states, with the highest rates of increase in Wisconsin and North Dakota, while values fell in South Dakota.

A comment from a Minnesota lender captured the pessimistic sentiment for the sector: “With declining grain prices and a poor crop in the field 2024 is shaping up to be a below average year!”

Over the next few months, survey respondents said they expect further downward momentum in incomes. Across the district, 78 percent of lenders expect that farm income will decline in the third quarter of 2024, compared with 7 percent who forecast increases. The outlook for capital spending was also negative, while expectations for household spending were flat. Lenders predicted that loan demand will grow on balance in the upcoming quarter, with half of respondents expecting increases and 13 percent predicting decreased demand. The outlook for loan repayment was generally stable overall, as 71 percent of respondents reported they expect no change in repayment rates; however 22 percent forecast repayment rates to decrease. Almost all respondents were not planning any change in collateral requirements for borrowers.