FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Ag Credit Conditions and OutlookAgricultural Policy and Outlook ConferenceNovember 9, 2020

Cortney CowleyEconomist

The views expressed here are those of the speaker and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHThe Kansas City Fed has a high concentration of agriculture and monitors conditions closely. Average Farm Income as a Share of Total

Personal IncomeAverage Across Counties by Fed District, 2015-2017

Proportion of “Farm Dependent” Counties and Agricultural Banks

Source: BEA and staff.

*Agricultural banks are defined as banks with farm production and farm real estate loans equaling approximately 18 percent or more of total loans.

0 10 20 30 40 50 60

BostonPhiladelphia

New YorkRichmondCleveland

AtlantaSan Francisco

DallasSt. LouisChicago

MinneapolisKansas City

Share of U.S. Ag Banks*Farm Counties

Source: BEA, USDA, Ag Finance Databook and staff

Percent

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Outlook Themes

Bullet 1Bullet 2Bullet 3

• In contrast to the broader economy, U.S. agriculture had been in a prolonged downturn even before the pandemic.

• Economic conditions in agriculture have improved since April, but to government programs, and more recently, higher commodity prices.

• Agricultural credit conditions improved somewhat in the third quarter but remained weak.

• The outlook for the months ahead will depend on the path of agricultural commodity prices and government support.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Ag Banker Comments

• Government program payments will help, but marketing will be important to make ends meet this year. – Nebraska

• A large part of the loan demand is not for new projects but simply taking opportunity to lower borrowing rates. – Kentucky

• Recent rally in the grain market combined with more government support should make for a good last quarter in 2020 for farm incomes. – Minnesota

• Working capital deterioration is a leading concern in the farm sector. Government payments have helped to stabilize farm revenue but growing crop inventories pose problems if we can't restore stronger export activity. – Montana

• Farm economy is dependent upon strong government support that may not be replicated next year. Overall commodity prices have improved on lower grain stocks due in part to Chinese purchases; however, there is uncertainty of ongoing Chinese purchases. – South Dakota

• A lot of our farmers are exploring alternative crops for the future. Examples include: Barley for breweries, potatoes for potato chips, and cotton. - Missouri

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHEven before the pandemic, liquidity was expected to deteriorate alongside low profit margins.

Internal FR*Annual average through July 2020Note: Working capital for 2020 is USDA forecast as of September 2, 2020. Sources: USDA and Haver Analytics.

U.S. Farm Sector Working Capital

Internal FR

Ag Prices Received-to-Prices Paid

80

85

90

95

100

105

80

85

90

95

100

105

2010 2012 2014 2016 2018 2020*

Ratio Ratio

0255075100125150175200

0255075

100125150175200

2010 2012 2014 2016 2018 2020

Billion, 2020 $ Billion, 2020 $

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHThe pandemic disrupted agricultural markets in several key ways.

Internal FR

U.S. Meat Production

Sources: USDA, EIA and staff calculations.

U.S. Ethanol Production

400

600

800

1000

1200

Jan-

20Fe

b-20

Mar

-20

Apr

-20

May

-20

Jun-

20Ju

l-20

Aug

-20

Sep-

20

Thousand barrels per day

60708090

100110120

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-2

0

CattleHogsPoultry

Index (2019 = 100)

U.S. Food Expenditures

0

20

40

60

80

100

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-2

0

Food At HomeFood Away From Home

Billion dollars

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHHowever, prices of most ag commodities have improved notably since April.

Internal FR

Agricultural Commodity Prices

Sources: CME, WSJ and Haver Analytics.

-40-30-20-10

0102030

Broilers Cattle Corn Cotton Hogs Milk Soybeans Wheat

Q2 Average Q3 Average Sep. 30 Oct. 26

Percent change since Jan. 2020 Percent change since Jan. 2020

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHAlso, farm income is expected to be much higher than a year ago due to ad hoc government payments.

Internal FRSource: USDA.

020406080100120140

020406080

100120140

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Net Farm IncomeDirect Government Payments

Billion, 2020 $ Billion, 2020 $

U.S. Net Farm Income Direct Government Payments as a Share of Farm Income

010203040506070

010203040506070

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

Percent Percent

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHIn Federal Reserve Districts, a sharp decline in farm income in previous quarters abated somewhat in Q3.

0

50

100

150

200

0

50

100

150

200

2012 2013 2014 2015 2016 2017 2018 2019 2020

Farm Income

Kansas City Minneapolis St. Louis

Diffusion Index Diffusion Index

Source: Federal Reserve Banks of Kansas City, Minneapolis, and St. Louis.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHGovernment aid programs were expected to provide relief to farm finances.

0102030405060708090

100

10J KS MO MtnSts*

NE OK

Percent of respondents

Coronavirus Food Assistance Program (CFAP)

0102030405060708090

100

10J KS MO MtnSts*

NE OK

SignificantModerateNone

Percent of respondents

Paycheck Protection Program (PPP)

Source: Federal Reserve Bank of Kansas City

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

But farm borrower liquidity remains a top concern.

Internal FR

Tenth District Farm Borrower Liquidity

Source: Federal Reserve Bank of Kansas City

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Tenth District Kansas WesternMissouri

MountainStates

Nebraska Oklahoma

Q2 2020Q3 2020Expected in next three months

Diffusion Index Diffusion Index

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHFollowing multiple years of steady growth, demand for farm loans softened while fund availability has surged.

60

80

100

120

140

160

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Loan DemandLoan Fund Availability

Diffusion Index * Diffusion Index *

Expected in next three months

Tenth District Farm Loans

Source: Federal Reserve Bank of Kansas City

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHDue, in part, to government aid, repayment rates remained stable, and repayment problems have been “manageable”.

Farm Loan Repayment Rates Degree of Repayment Problems

020406080100120140160

020406080

100120140160

2010 2012 2014 2016 2018 2020

Diffusion Index

Expected in next three months0

5

10

15

20

25

30

0

5

10

15

20

25

30

2015 2016 2017 2018 2019 2020

MinorMajorSevere

Percent of respondents

Source: Federal Reserve Banks of Chicago and Kansas City.

FRB Chicago

FRB Kansas City

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHDelinquency rates on farm loans have trended higher, but the increases have been modest.

Internal FR*As of Q2 2020Sources: Board of Governors and Farm Credit Administration.

Farm Loan Delinquency Rates

012345

012345

Commercial BanksFarm Credit System

Percent Percent

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHThe strength of farmland markets has supported ag credit conditions and farm balance sheets.

Farm Real Estate Values

*Average of indices for each participating District – Chicago, Kansas City, Minneapolis, St. Louis, and Dallas.Sources: USDA, Federal Reserve Surveys of Agricultural Credit Conditions and staff calculations.

80

100

120

140

160

180

200

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

U.S. Federal Reserve Disticts*

Index (2010=100) Index (2010=100)

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHHistorically low interest rates have also eased some pressure on farm finances.

Interest Rates on Non-Real Estate Farm Loans

Sources: Agricultural Finance Databook and Federal Reserve Bank of Kansas City.

02468101214161820

02468

101214161820

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Percent Percent

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCHOver the past several years, expectations of long-term interest rates have gradually declined.

0.00.51.01.52.02.53.03.54.0

0.00.51.01.52.02.53.03.54.0

2015 2020

Median Federal Funds Rate, September

Current3-Year Projection

PercentPercent

Source: Board of Governors.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Thoughts

Bullet 1Bullet 2Bullet 3

• The potential for severe difficulties in agriculture associated with the pandemic has lessened, for now.

• Agricultural credit conditions improved in the third quarter but remained weak.

• Concerns appear likely to reemerge, however, in early 2021 as government support fades, and the outlook depends on underlying market conditions.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Questions?

Cortney CowleyEconomist

Federal Reserve Bank of Kansas CityCortney.Cowley@kc.frb.orgTwitter: @CortneyCowley

For more information:https://www.kansascityfed.org/research/agriculture

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

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