State's ag industry braces for slowdown

KANSAS CITY, Mo. -- Even before most Missouri farmers have completed harvesting this year's crops, many realize their most important "commodity" is a check from the U.S. Treasury at the end of the year.

That's good for the farmers, because signs currently point to a lower per-farm income this year than in 2001, according to Federal Reserve economist Kendall McDaniel. His predictions are based on slumping commodity prices, drought conditions and higher land rental rates.

The federal government is expected to provide 43 percent of the state's farm income in 2002.

"Without this aid, many of our farmers would have been unable to fully service their debt obligations," McDaniel said.

Over the past decade, many farmers have also relied on off-farm income to support their agricultural operations. Statistics show that in more than half of all farm households either the operator, the spouse or both hold jobs off their land.

Crop receipts this year will also be lower. The U.S. Department of Agriculture forecasts only moderate crop receipts in 2002, with the estimate expected to go lower as the extent of drought conditions becomes known. Although extremely dry and hot weather has raised prices of many farm commodities, the unfavorable weather has also served to lower production forecasts.

More buyers

Despite gloomy prospects, some conditions have merged to boost land values. Stock market declines have brought new buyers to rural auctions, with many nonfarm buyers purchasing farmland for recreational use as well as a hedge against past investment losses. Farmers looking to expand their operations have heightened demand.

McDaniel said that in states served by the Kansas City Federal Reserve, the average value of land has risen at least 3 percent per year in the past decade, compared to an average drop of 3 percent per year in the 1980s.

Increasing land values have bolstered many producers' equity positions in recent years. Farm sector equity rose 2 percent in 2001 to $1.02 trillion, while the value of farm assets rose 2.4 percent in 2001 to $1.2 trillion due to strong gains in land values. This category accounts for nearly 80 percent of farm assets.

The other side of the coin, however -- farm debt -- jumped 4.8 percent in 2001, reaching $192.8 billion, slightly above its peak in 1984. Despite this high debt level, the state's farm economy remains relatively solvent with a debt-to-assets ratio of 16 percent, well below the peak of 22 percent in 1984.

The bank bellwether

McDaniel said the best indicator of how well farm lenders are faring is the number of bank failures. No agricultural bank in Missouri has failed in the last two years, and only five banks in the Kansas City bank's district have failed since 1994. This is a contrast from the 1980s, when 322 farm banks were forced to close their doors.

In addition, less than 2 percent of farmers with loans are behind in payments, a far cry from the level posted in the 1980s. McDaniel said, however, that farm loan repayment rates and the demand for new rm loans edged down in the second half of 2001 and the first half of 2002.

Federal Reserve economists are now predicting that farm finances may weaken in the coming year. While the overall economy is showing some muscle, job gains in rural America have been sluggish and farmers are struggling with weaker export demands and growing supplies in the livestock sector. But gains in land values and government payments will limit the decline in farm finances, economists believe.