Farm income and agricultural credit conditions improved significantly according to agricultural lenders across major portions of the U.S. in the fourth quarter. Despite tumultuous conditions related to the ongoing pandemic throughout 2020, the prices of several key agricultural commodities increased sharply in the final months of the year. Dramatic improvements in crop prices drove the sharpest turnaround in agricultural lending conditions in more than a decade.

Fourth Quarter Federal Reserve District Ag Credit Surveys

Following years of steady deterioration, various measures of agricultural credit improved in the fourth quarter. On average, farm loan repayments increased for the first time since 2013 according to regional Federal Reserve surveys of agricultural lending (Chart 1). The rate of loan repayment increased from a year ago in all participating Districts expect Dallas, with the fastest pace of increase reported in the Minneapolis and Chicago Districts.

Chart 1, Farm Loan Repayment Rates, includes two individual charts. The left, Federal Reserve System, is a line graph from 2010 to 2020 showing the average farm loan repayment rate diffusion index for all participating Districts, the index remained below 100 since 2014 and increased substantially to above 100 in Q4 2020. The right, Federal Reserve Districts, shows the diffusion index during Q2 2020, Q3 2020 and Q4 2020 for each individual District in a clustered column chart, indicating an index above 100 in Q4 2020 for all Districts except Dallas.

An increase in farm income in the fourth quarter appeared to be a primary driver of the recent strength in agricultural credit conditions. Similar to loan repayment rates, farm income was higher than a year ago across all participating Districts (Chart 2). With better financial outcomes in 2020, capital spending plans of farm borrowers also strengthened in the fourth quarter and were expected to increase in all Districts in coming months.

Chart 2: Farm Income and Spending, includes two individual charts. The left, Farm Income, is a line graph from 2010 to 2020 showing the individual farm income diffusion index for all participating Districts and expectations for the next three months. The index remained below 100 in all Districts since 2014, increased substantially to above 100 in Q4 2020 and was expected to remain above 100 in the next quarter. The right, Capital Spending, , is a line graph from 2010 to 2020 showing the individual capital spending diffusion index for all participating Districts and expectations for the next three months. The index remained below 100 for all Districts since 2014,  increased to above 100 in the fourth quarter of 2020 in the Minneapolis District, was  only slightly below 100 in Kansas City an St. Louis Districts and was expected to be above 100 in all District during the next quarter.

Other financial indicators also shifted quickly in the fourth quarter as borrowers experienced relief from previous years of financial stresses. On average across all Districts, loan demand contracted at the fastest pace since 2013 and fund availability increased at the fastest pace since 2013 according to agricultural bankers (Chart 3). The path of both indicators was consistent across all regions, but loan demand declined at the quickest rate in the Dallas District and liquidity growth was strongest in the Chicago District.

Chart 3: Farm Loan Demand and Fund Availability, is a line graph from 2010 to 2020 showing the average loan demand and fund availability diffusion index for all participating Districts. The loan demand index was below zero and at the lowest level since 2013 in Q4 2020 and the fund availability index remained above zero and was at the highest level since 2013.

Farmland values and cash rents remained strong across most reporting states. Although drought seemed to put some pressure on farm real estate markets in the Mountain States, values for nonirrigated cropland increased in all other states in the fourth quarter (Chart 4). Gains were strongest in the Upper Plains and Corn Belt, where farmland values rose by 8% in North Dakota and 9% in Northern Indiana. Cash rents on nonirrigated cropland also increased moderately. In the Dallas, Kansas City, Minneapolis, and St. Louis Districts, cash rents rose an average of about 2% in the fourth quarter.

Chart 4: Nonirrigated Cropland Values and Cash Rents, includes a map and chart. The left, Nonirrigated Cropland Values, Fourth Quarter; is a map detailing annual percent changes in cropland values for individual states in all participating Districts during Q4 2020. North Dakota: 8%, Minnesota: 3%, South Dakota: 7%, Southern Wisconsin: 7%, Mountain States (Colorado, New Mexico and Wyoming): -2%, Nebraska: 2%, Iowa: 5%, Northern Illinois: 6%, Kansas: 1%, Western Missouri: 7%, FRB St. Louis District: 4%, Oklahoma: 4%, and Texas: 5%. The right, Nonirrigated Cropland Cash Rents, Fourth Quarter; is a line graph from 2010 to 2020 showing the four quarter moving average annual percent change in cropland cash rents in Dallas, Kansas City, Minneapolis and St. Louis Districts. Cash rents increased by about 2% in all District during Q4 2020.

Lower interest rates have likely provided some support to farm finances and the values of farm real estate. Compared to the previous year, rates on short-term operating loans and long-term farm real estate loans fell by approximately one percentage point at agricultural banks across the United States in the fourth quarter (Chart 5). The sharpest pace of decline was reported in the Chicago District, where interest rates on operating loans have fallen by 1.6 percentage points since 2018.

Chart 5: Interest Rates by Loan Type, Fourth Quarter; includes two individual charts. The left, Farm Operating Loans, shows the average interest rate on farm operating loans for all participating Districts in the fourth quarter of 2018, 2019 and 2020 in a clustered column chart; indicating a sharp drop in 2020 across all Districts. The right, Farm Real Estate Loans, shows the average interest rate on farm real estate loans for all participating Districts in the fourth quarter of 2018, 2019 and 2020 in a clustered column chart; also indicating a sharp drop in 2020 across all Districts.

Conclusion

Agricultural credit conditions improved in the fourth quarter alongside increases in commodity prices and strong support from government payments. Bankers reported an increase in farm income for the first time in eight years, driving an increase in farm loan repayment rates, a decrease in loan demand and expected increases in spending. Stronger economic and credit conditions in the sector also supported gains in farm real estate in numerous regions. While continued weakness in cattle markets and harsh weather conditions still left headwinds for some producers, the overall outlook for agricultural credit conditions going into 2021 was markedly more optimistic than recent years.

Data and Information

Excel SpreadsheetFederal Reserve Ag Credit Surveys Historical Data

Excel SpreadsheetFederal Reserve Ag Credit Surveys Tables

txtAbout the Federal Reserve Ag Credit Surveys 

The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. 

Authors

Cortney Cowley

Senior Economist

Cortney Cowley is a senior economist in the Regional Affairs Department of the Federal Reserve Bank of Kansas City. She also serves as a special advisor on the agricultural econo…

Ty Kreitman

Associate Economist

Ty Kreitman is an associate economist in the Regional Affairs Department at the Omaha Branch of the Federal Reserve Bank of Kansas City. In this role, he primarily supports the F…