Agricultural conditions worsened across the U.S. due to weak farm income, persistent drought, and declining exports, according to the latest Fed Beige Book report.

Prices for corn and soybeans fell in the Midwest and western and southern Plains. Cropland values in the western Plains have leveled off after recent gains while pasture values continue to rise due to strong demand. Input prices for the upcoming spring planting season appear stable in the Mid-Atlantic and Midwest regions. The strengthening dollar and labor disputes at ports along the West Coast have hurt agricultural exports. Drought conditions have improved but still persist in some areas of the Southeast and Southern Plains, while drought conditions in California hurt yields and have not improved.

Agricultural bankers reported that non-irrigated cropland values edged down in the fourth quarter of 2014 from recent peaks in several states while year-over-year value gains have moderated in others (Map). Ranch land values, however, continued to rise with strong demand for high-quality pasture. Source: Federal Reserve District Agricultural Credit Surveys (Chicago, Minneapolis, Kansas City, and Dallas)

Prepared at the Federal Reserve Bank of St. Louis and based on information collected through February 23, 2015. The Beige Book summarizes comments received from business and other outside contacts.

The following is a Fed region-by-region summary of farm sector economic conditions, starting in the Mid-Atlantic and moving west:

Richmond – Agribusiness contacts cite typical seasonal slowdowns, but business conditions are slightly stronger than at this time last year. Additionally, a farmer in Virginia noted that the spring outlook was “really good.” Planting and harvesting of sod, shrubs, and trees is occurring in South Carolina and Virginia, but adverse weather has reduced the number of days available to do so. Input prices are mostly stable, while sod prices are up slightly. A South Carolina farmer noted concern over low commodity prices and difficulty navigating recent insurance legislation.

Atlanta – Drought conditions improved in parts of the region although some areas are still suffering from dry conditions. Florida orange growers continue to combat citrus greening while the USDA announced additional funding to help fight the disease. The most recent 2015 domestic production forecasts for rice, soybeans, peanuts, and cotton were unchanged from a month ago while beef, pork, and broilers production projections were up from the prior month.

Chicago – Corn, soybean, and wheat prices have edged lower since the early January report, although they recovered some in recent weeks. Apart from fuel costs, input costs for spring planting remain steady. Some farmers have purchased lower quality seed than last year to reduce planting costs. Even though higher relative input costs are expected to shift acres toward soybean production and away from corn, farmers are said to be reluctant to plan major changes in crop rotations. Contacts also note plans to return some marginal ground to pasture or hay production, instead of planting corn or soybeans this spring. Hog production remains strong, with no major issues from diseases, which cut production last year. The recovery in hog production has pushed down pork prices substantially, and consumers have begun substituting from beef to pork. Still, , somewhat lower cattle prices have not translated into lower retail prices for beef. Milk prices are falling on rising dairy product stocks and stalled exports. The slowdowns at ports along the west coast hurt exports of many agricultural products.

St. Louis – Close to 90% of the region’s winter wheat crop was rated in fair or better condition. Total red meat production across the southern Midwest and northern Mid-South in 2014 was largely unchanged compared to 2013. Missouri exhibited strong production increases in 2014, offsetting decreases observed in other states in the region.

Minneapolis – Agricultural conditions deteriorated, with livestock and dairy producers faring better than crop farmers. According to preliminary results from the Minneapolis Fed’s fourth-quarter (January) survey of agricultural credit conditions, 70% of respondents said farm incomes had fallen from a year earlier, while 73% reported decreases in capital spending; the first-quarter outlook was similar. Land values and rents fell in 2014 across Minnesota and North Dakota, according to appraisers.

Kansas City – Farm income has weakened further since early January, but cropland values are generally holding steady. Corn and soybean prices edged down in January and early February, and farm income remains well below year-ago levels even as profitability in the livestock sector continues relatively strong. After several years of herd culling, western Plains cattle producers retained more replacement heifers compared with last year, indicating the potential for rebuilding herds in 2015. Following several years of strong gains, District non-irrigated and irrigated cropland values have leveled off while ranch land values continued to rise due to strong demand for good-quality pasture. Lower farm income has trimmed farm loan repayment rates and increased demand for new loans as well as loan renewals and extensions. Looking forward, District contacts look for modest declines in cropland values and further deterioration in farm loan repayment rates amid tighter profit margins for crop producers.

Dallas – Moisture conditions have stabilized for a large portion of Texas and neighboring Southern Plains states, but drought conditions persist in some areas. Cotton prices are below profitable levels for most producers. Prices and export demand for sorghum is high, which may lead more farmers to favor sorghum over cotton when making planting decisions this spring. The strong dollar has slowed agricultural exports. Corn, cattle, wheat, soybeans and dairy prices have declined since early January.

San Francisco – Conditions are mixed. Drought and unseasonably warm weather in parts of the District depressed yields, but the associated increases in many of the prices received by farmers resulted in slightly higher revenues. Farmers remain concerned that the drought will continue, requiring them to leave more acreage fallow. Numerous contacts report that the labor disputes at West Coast ports reduced agricultural exports, as perishable products such as fruits wasted away in storage containers waiting for shipment. Contacts also note that the stronger dollar making U.S. agricultural goods less competitive and limiting exports. ■

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With gross per-acre revenues for the 2014 corn and soybean crops down a forecast 19% and 23%, respectively, from the prior year’s crop, the slow inevitable correction in annual row-crop land values is underway.

Institutional investment returns in U.S. annual cropland shriveled to 6.3% (2.5% appreciation and 3.8% income return) in 2014, before management fees. That’s nearly one-third the 16.7% return reported in 2013, according to the National Council of Real Estate Investment Fiduciaries, an investment manager trade group in Chicago.

Six managers—Halderman Real Asset Management, Hancock Agricultural Investment Group, Prudential Agricultural Investments, UBS AgriVest LLC, TIAA-CREF’s Westchester Group Investment Management and public farmland REIT Gladstone Land Corp.—contribute data on 403 annual cropland properties valued at $3.02 billion. The managers typically lease the land to local farmers who raise a mix of corn, soybeans, cotton, alfalfa, peanuts, potatoes, rice, strawberries,vegetables and wheat.

Regionally, annual row cropland appreciation rates ranged widely in 2014, from up 8.4% in California and 6.7% the Oregon/Washington region, to down nearly 1% in Texas and off about 0.50% in the Corn Belt states of Illinois, Indiana and Ohio, according to NCREIF.

Permanent crop investments—driven by California almond and pistachio properties—continue to generate standout returns. For 2014, permanent crop properties posted a 21.1% return before investment fees. The double-digit return was comprised of 6.2% appreciation and 13.4% income return, based on 220 properties valued at $2.51 billion.

Investments in cranberry bogs—primarily in central Wisconsin—continue to suffer as large supplies pressure cranberry prices and crimp returns. The value of permanent crop properties in the Lake States region (Mich., Minn., Wis.) depreciated 11% in 2014—the fifth straight year of price declines. Permanent crop tracts in this region have depreciated 33% since January 2009, according to NCREIF data.

Last fall, the U.S. Department of Agriculture agreed to purchase up to $55 million in cranberry products, double its previous purchase, which was in January 2014. It is expected to absorb up to 68 million pounds of surplus cranberries. ■

© 2015 Farmland Investor Letter All rights reserved.

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With crop prices broadly lower than a year ago, farmers are focused on minimizing costs in 2015, rather than maximizing output. Growers are purchasing fewer and lower cost inputs. In addition, rental terms for some cropland are under pressure, according to the latest Fed Beige Book report.

Contacts in the Mid-Atlantic region report that agribusiness conditions were better than in the same period a year ago. In the southern Midwest and northern Mid-South, the winter wheat harvests are likely to be lower than average, largely reflecting planting delays in Illinois due to wet weather in October. The level of red meat output across the southern Midwest and northern Mid-South through November was below year-earlier levels, while hog and milk output in the key states of the Midwest was higher than expected during the reporting period.

Lenders in the Northern Plains expected farm incomes in the fourth quarter of 2014 to come in below the same period a year ago. Prices received by farmers in the Minneapolis District are down from the previous year for corn, soybeans, wheat, hay, and milk; prices are higher for cattle, hogs, eggs, and poultry. Growing conditions in the Central Plains were generally favorable in December, and crop prices rose modestly. The Kansas City Fed reports that wheat prices increased modestly amid global supply concerns about limits on Russian grain exports and lower production estimates in Australia.

In the Southern Plains, conditions improved slightly, but drought persists in portions of Texas. Some areas of the Southeast saw a moderate improvement in drought conditions. Dairy farm profits in the Pacific West increased significantly over the past year, but milk futures prices declined recently. Uncertainty regarding future water availability in California slowed new plantings of permanent crops.

U.S. Federal Reserve System Districts

Prepared at the Federal Reserve Bank of San Francisco and based on information collected through January 5, 2015. The Beige Book summarizes comments received from business and other outside contacts.

The following is a Fed region-by-region summary of farm sector economic conditions, starting in the Mid-Atlantic and moving west:

Richmond—Contacts report seasonal slowing since the previous Beige Book, although business conditions are better than a year ago. Several farmers reported that planting and harvesting were finished for the year, although harvesting completion dates were later than usual. Farmers in South Carolina and Virginia report no change in input prices in the past six weeks and say that output prices were generally unchanged.

Atlanta—The Southeast experienced varying degrees of drought ranging from abnormally dry conditions to a few areas of severe drought, some areas of Alabama, Georgia, and the Florida Panhandle saw some moderate improvement in drought conditions. Protein producers that rely on corn for feed report improved margins because of continuing low corn prices. The most recent cotton and orange crop forecasts are slightly higher than last season’s production.

Chicago—Corn and wheat prices rose during the reporting period, while soybean prices were flat. Wheat prices were up because of drought and cold snaps in areas producing winter wheat and because of limits by the Russian government on exports. The record harvest created concerns about sufficient crop storage space, but subsequent reports indicate sufficient space is available. Shipping delays have eased, allowing stocks to move more smoothly to end users. The late extension of beneficial tax deductions will give a boost to after-tax agricultural income in 2014. Low crop prices are prompting farmers to focus on minimizing costs instead of maximizing output in 2015; they are purchasing fewer and lower cost inputs. In addition, rental terms for some cropland are under pressure because farmers are not expected to make enough to cover their costs next year. Ethanol margins compressed with the drop in oil prices. Hog and milk output is higher than expected, leading to further price decreases. Cattle prices are little changed, but have turned more volatile.

St. Louis—As of late November, about 96% of the region’s winter wheat crop was rated in fair or better condition. On average, 81% of the winter wheat crop had emerged across the District. That is slightly below the five-year average progress rate for this time of year. The majority of the slowdown is due to planting delays in Illinois because of wet weather in October. Year-to-date red meat production in the District was nearly 9% lower in November 2014 than in the same month last year. This decline is driven primarily by lower production in Illinois, Indiana, and Missouri, which collectively produce around 89% of the region’s red meat output. Year-to-date coal production in the District was 2.8% higher in November 2014 than in the same month last year.

Minneapolis—Conditions remain mixed since the previous report, with livestock and dairy producers faring better than crop farmers. According to the Minneapolis Fed’s third-quarter (October) survey of agricultural credit conditions, 69% of respondents said farm incomes have fallen from a year earlier, while 63% reported decreases in capital spending. The fourth quarter outlook was weaker, as 81% of lenders expect farm incomes to fall, while 77% expect capital spending to decrease from a year earlier. Prices received by farmers in December are lower from a year earlier for corn, soybeans, wheat, hay, and milk; prices are higher for cattle, hogs, eggs, and poultry.

Kansas CityGrowing conditions were generally favorable in December, and crop prices rose modestly. Although some western areas of Kansas and Oklahoma remain dry, scattered rains have improved soil moisture in many parts of the District and the winter wheat crop is in mostly good condition. Wheat prices increased modestly amid global supply concerns due to limits on Russian grain exports and lower production estimates in Australia. Corn and soybean prices also rose modestly since the last survey period due, in part, to a slight downward revision in 2014 U.S. production estimates. In the livestock sector, weaker export demand for pork has put downward pressure on hog prices. High feeder cattle prices are prompting some producers to feed cattle to heavier weights to boost profit margins.

Dallas—Conditions improved slightly, but large portions of the state remain in drought. Harvesting has wrapped up for all row crops, except cotton, which has been slow this year and is nearing completion. Winter wheat has been planted and some areas look good with ample moisture received, while other areas need more rain to yield a decent crop and good grazing conditions. Cattle prices have declined slightly but remain near record highs. Dairy prices are markedly lower due to increased global production.

San Francisco—Conditions are mixed period. Lower petroleum prices are reducing the cost of gas and fertilizer. However, some farmers also face lower prices for their commodities. In some areas, restaurants are purchasing fewer vegetables. Dairy farm profits increased significantly over the past year, but milk futures prices have declined recently. Uncertainty regarding future water availability in California ha slowed new plantings of permanent crops. ■

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