Tenth Federal Reserve Bank district interest rates on farm loans increased sharply in the third quarter, and the acceleration in farm real estate values continued to ease, said Nate Kauffman and Ty Kreitman, economists at the Federal Reserve Bank of Kansas City, in a release.
Farm income and credit conditions remained solid, but the pace of improvement softened, Kauffman and Kreitman said. The financial effect of drought also intensified, particularly in the southern and western portions of the district, which is comprised of states, and portions of states in the center of the lower 48.
Despite recent headwinds, farm finances remained strong and continued to support sound agricultural loan performance, they said.
OUTLOOK REMAINS POSITIVE
The outlook for the agricultural economy generally remained positive despite a recent pullback in prices of some key farm commodities, the Bank release said. Volatility in crop markets, higher expenses and drought could hinder incomes for some producers, but prices of key crops and livestock remained at multi-year highs, so profit opportunities across the farm sector remained favorable.
The substantial improvement in farm finances and a surge in agricultural real estate values over the past two years have also bolstered balance sheets and continued to provide ongoing support to many operations.
INTEREST RATES AND FARMLAND VALUES
The average rate charged on farm loans rose rapidly alongside higher benchmark rates, the release said. Variable and fixed rates on all types of loans were about 75 and 65 basis points higher than last quarter, respectively.
Farm banks have increased rates alongside the historically sharp rise in the federal funds rate, and financing costs for farmers have reached the highest level since 2019, the economists said.
Higher interest rates have had a direct effect on farm borrowers, according to lenders responding to the Federal Reserve Bank’s latest questionnaire. About two thirds of respondents indicated that higher interest rates had a negative effect on financial conditions for borrowers.
Banks in Oklahoma noticed the most pronounced effect, with about a third reporting a significant negative effect, the release said.
GROWTH SOFTENING
As interest rates increased, growth in farm real estate values showed more signs of softening, the Bank said. The value of non-irrigated farmland increased about 23% and 3% from the previous year and quarter, respectively.
The pace of growth has moderated following steep acceleration in 2021 and cash rental rates have also followed a similar path, the economists said.
Additional growth in farmland values and cash rents was anticipated in the coming months, but the expected pace of increase continued to moderate, they said. About 30% of banks expected farmland values to increase in the next quarter compared with a year earlier, down from about half from 2021.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $150.11 to $153.77 per cwt, compared with last week’s range of $150.00 to $154.40. FOB dressed steers, and heifers went for $236.63 to $239.43 per cwt, versus $233.15 to $242.13.
The USDA choice cutout Thursday was down $1.40 per cwt at $263.27 while select was up $1.61 at $236.83. The choice/select spread narrowed to $26.44 from $29.45 with 73 loads of fabricated product and 21 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $2.15 to $2.25 a bushel over the Dec futures and for southwest Kansas were steady at $1.00 over Dec, which settled at $6.53 1/4, down 11 1/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $175.51 per cwt down $0.79. This compares with Thursday’s Nov contract settlement of $178.62, down $0.90.