By Federal Reserve Bank of Kansas City, Nathan Kauffman, Vice President and Omaha Branch Executive and Ty Kreitman, Assistant Economist

Farm income decreased across the Tenth District (which includes the states of Colorado, Missouri, Kansas, Nebraska, New Mexico, Oklahoma and Wyoming by the Federal Reserve Bank) and the trend of steady deterioration in agricultural credit conditions continued in the first quarter of 2019. With low income weighing on farm finances, the pace of decline in farm loan repayment rates increased slightly. In addition, carry-over debt increased again for many borrowers and bankers continued to restructure debt and deny a modest amount of new loan requests due to cash flow shortages. Major flooding and blizzards across some regions in the District late in the first quarter may also put additional financial pressures on some farm borrowers as damages continue to be assessed.

Farm Income

A majority of bankers across the District continued to report decreases in farm income during the first quarter. Despite a slight improvement in livestock prices toward the end of the period, the pace of decline in farm income quickened slightly from a year ago and from the prior quarter (Chart 1). A similar pace of decline also was expected in coming months. However, significant increases in hog prices in the final weeks of the quarter and into April improved revenues for some operations in the livestock sector.

Reductions in farm income were sharpest in Nebraska and Missouri, states heavily concentrated in corn and soybean production. The drop was largest in Missouri, where farm income was steady a year ago (Chart 2). While some areas were heavily affected by spring flooding and blizzards, it may be months before the full impact to farm income is realized as immediate damage and implications for the 2019 operating cycle were being evaluated.

Credit Conditions

As farm income remained low, demand for farm loans remained high and the ability of farm borrowers to repay loans weakened at a slightly faster pace than in previous quarters. Lower rates of repayment in Missouri and Nebraska were the largest contributors to overall weakness in farm loan repayment rates across the District (Chart 5). Similar to farm income, recent severe weather also may have contributed to slower repayment rates and increased loan demand, but the full impact remains uncertain pending assessment of damages.

As farm cash flows remained weak, bankers continued to restructure debt and even deny some farm loan requests. Despite moderating from a high of 23 percent in 2017, about 14 percent of new farm loan requests involved restructuring to meet liquidity needs 

New loan requests were denied at a pace of 8 percent because of cash flow shortages, a rate similar to a year ago While remaining near the District average, the rate of denial on new loan requests in Kansas increased moderately compared with a year ago.