Feb. 8 (Bloomberg) -- The jump in commodity prices last year improved the financial health of U.S. farmers, sending Midwest cropland to record values and boosting profits for rural banks and equipment makers, a Federal Reserve report concluded.
Higher incomes allowed farmers to repay debt in the fourth quarter, reducing delinquencies and boosting bank profit, according to the report, produced by the Federal Reserve Bank of Kansas City. Agricultural lenders are outperforming other bankers as returns on assets and equity gained for a third straight quarter, the Fed said.
The price of corn, the biggest U.S. crop, surged 88 percent in the past year, cotton more than doubled, and soybeans rallied 53 percent. Wheat touched a 29-month high today. The rally has fueled a jump in property values. In Iowa, the largest corn-grower, cropland jumped 13 percent from a year earlier, and as much as 25 percent of purchases in the state are being made by outside investors, said Jason Henderson, a Fed economist.
“If you look at the Midwest, heartland area, they’re enjoying stronger economic activity, lower levels of unemployment and stronger job growth, primarily because agriculture and commodity markets have been so strong,” Henderson said today in a telephone interview from the Kansas City Fed’s branch in Omaha, Nebraska.
As much as 16 percent of the $14.87 trillion U.S. economy may be affected by agriculture, including equipment manufacturing, food processing and grain handling, according to Henderson, the lead author of the Fed report.
Cheap Farm Loans
As demand for land and farm machinery improves, interest rates on loans are the lowest on records going back to 1982, Henderson said. Farmers in the Great Plains can get loans at 6.4 percent interest to buy cropland and machinery loans at 6.7 percent, the lowest in almost 30 years, he said.
Low borrowing costs on cropland “is a function of the overall rest of the economy,” which hasn’t improved as quickly as agriculture, Henderson said. The Federal Reserve’s benchmark interest rate has been unchanged in a range of zero percent to 0.25 percent since November 2008.
U.S. farm income last year probably exceeded the 2004 record of $87.3 billion, and cropland values gained as much as 10 percent, according to estimates by Neil Harl, an agricultural economist at Iowa State University, and former adviser to the governments of Ukraine and the Czech Republic.
Higher Food Costs
World food prices rose to a record in January on higher dairy, sugar and cereal costs and probably will remain elevated, the United Nations said Feb. 3. An index of 55 food commodities climbed 3.4 percent from December to 231 points, the seventh straight increase, the UN’s Food and Agriculture Organization said. Dairy prices led advances among five food categories, rising 6.2 percent, the Rome-based agency said.
In the U.S., retail food costs rose 1.5 percent last year and will gain as little as 2 percent in 2011, the Department of Agriculture estimates.
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