Minneapolis Fed survey shows concern over price volatility, interest rates

The Federal Reserve Bank of Minneapolis shared the results of its recent Q1 2023 Agricultural Economic Conditions Survey. The Fed surveys agricultural bankers throughout the district to get a picture of what's really going on in the Ninth District and found some uncertainty as they look into the future.

Joe Mahon is the Regional Outreach Director for the Minneapolis Fed, and he said things are looking "pretty solid" right now. The Fed does a survey once a quarter because agriculture is such an important part of the overall economy.

"What we found from the first quarter survey is farmers continue to be in a pretty solid position," Mahon said. "This has been true since the waning period of COVID-19. Strong commodity prices have benefitted farm households quite a bit.

"Just over half the bankers in the survey said that farm income had increased," he continued. "Only 15 percent of the bankers said they saw a decrease in farm income. Along with the higher income, nearly every lender reported that customer liquidity improved relative to last year. So it wasn't just higher incomes, but farmers also had more net cash on hand."

As incomes stayed strong through the first quarter of this year compared to 2022, it led to increases in household spending. A slight majority of the bankers said farm spending increased compared to 2022. But, Mahon said capital spending was a different story. Purchases of items like new equipment and buildings stayed relatively flat compared to last year.

"The bankers in our survey largely attributed that to supply chain issues and the overall availability of equipment," he said. "Higher interest rates are another factor because it's going to take more money to make those purchases. We did continue to see higher interest rates in the first quarter, which wasn't surprising given the current economic environment."

The Minneapolis Fed also noted a higher rate of loan repayment thanks to the stronger cash positions of many farmers. Two in five bankers told the Fed they saw increased repayment rates, and most of the rest saw no change in loan repayment rates. Along with that, there was a significant decrease in loan demand.

"Farmers are asking for less credit because they have cash on hand," Mahon said. "Plus, with the higher interest rates, it's more expensive to get a loan right now. We do ask bankers what interest rates they currently charge on loans for operating the farm, buying new machinery, and for real estate loans. It's no surprise that those rate went higher in the first quarter."

The bankers also talked about land prices climbing in their areas compared to last year, as did cash rental rates, which he called "good news."

"Across the region, on average, bankers told us the value of an acre of non-irrigated land increased 12 percent in the first quarter compared to the same time in 2022," Mahon said. "That's pretty strong growth, but it is growing at a slower rate than the last few years."

Earlier in 2022, the growth rate was more than 20 percent. A state-by-state breakdown this year shows Minnesota farmland costs up 13 percent, North and South Dakota were up 11 percent and nine percent, respectively. Montana farmland was up 12 percent, and northern Wisconsin was up two percent.

"We also ask what it costs to rent an acre of land in the district," Mahon said. "We have a lot of producers growing crops on land they don't own. Those rates are growing, but not as much as land values. Minnesota was up nine percent compared to last year, South Dakota was eight percent higher, North Dakota was five percent higher, while northern Wisconsin was up three percent, and Montana cash rents were slightly higher."

One important part of the survey is asking bankers what they anticipate coming during the next quarter, and that's where this survey gets a little uncertain. The income picture unfortunately takes a negative turn in the outlook, and commodity prices are the biggest reason for the potential drop.

The overwhelming concern of ag bankers for this year is commodity price volatility, with just over half (52 percent) the respondents listing it number one. The next biggest concern was interest rates, followed by input costs and availability.

"A lot of folks in the survey pointed to expected downward movement in agricultural commodity prices," Mahon said. "Add persistently high input costs and farmers' profit margins are going to be compressed.

"We're still seeing growth in incomes, but the forward-looking expectations for incomes are a little more moderate than what we've seen so far. We're seeing a rising interest rate environment leading to concerns among producers about that and other costs of doing business. That's put a little more uncertainty in expectations going forward," he concluded