John Deere
When farmers get a little extra income, they spend on equipment. This old John Deere was found in southeast Washington State.

The U.S. Department of Agriculture predicted in February that net farm incomes would be up 12.7 percent this year over 2006. That hefty increase was too modest. In August, the USDA revised its figures and predicted farm incomes would set a record at $87.1 billion.

That’s 47.6 percent above 2006 and 30.9 percent above what was predicted just six months earlier.

The Federal Reserve Bank of Kansas City just released a report on this incredible increase in farm income . The ever-useful Kansas City Fed’s report is entitled “Farm Spending Surges With Record Income,” and to us at the Yonder, spending is the story. Yes, agriculture is pulling in record income. But farm income is being spent, and it’s changing rural communities.

We have read mostly about the income part of the equation. There are higher grain prices, driven by worldwide demand and ethanol production. Livestock and milk prices are higher, also due to demand across the world. This report, however, tells how this income is being distributed around the countryside.

net farm income

Farm income has jumped in 2007 and is far above the average for the past decade.

Farmers spend to improve their farms, it turns out. Increased income has fueled much higher farm capital spending, according to the Fed’s report. Farmers are borrowing money to build grain storage facilities (according to Kansas City area bankers); and they are buying tobacco harvesting equipment and building new barns around Richmond, Virginia. Sales of combines increased 14.2 percent through August, according to the Fed. One irrigation equipment supplier reported second quarter sales 22 percent above last year.

Farmers are borrowing, but they are also using their increased revenues to pay down loans. Banks in the Kansas City and Chicago region report that loan repayment rates are the highest in two years. At the same time, loan renewals and extensions have dropped.

crop costs

Expenses are rising, too, however, along with land prices.

Increasing revenues have quickly translated into higher land prices. Land prices are higher in most regions west of the Mississippi River. Ranchland has posted the strongest gains, up double digits over a year ago, according to the Kansas City Fed. Those prices, however, are mostly driven by the demands of recreation rather than ranching. The Richmond district of the Fed (West Virginia, Virginia, Maryland and the Carolinas) was the only area to report declines in land prices.

What happens next? The Fed notes that the ethanol business is rapid cooling , but that “leaner ethanol profits should not dramatically impact commodity demand, as long as existing plants remain in operation.”

The bigger problem is a rapidly rising cost of production. Costs have risen right alongside farm revenues. Costs were up nearly 9 percent in 2007 — with rapid gains in interest payments and the cost of feed, seed, transportation and storage.

john Deere
An Upper Great Plains Deere.

Moreover, it’s farming, so any number of things could go wrong in the near future. Credit could tighten further. The drought continues and bad weather can wipe out profits in an afternoon. After all, last year freezes nipped fruit trees and rainstorms wrecked a promising wheat crop in Kansas and Oklahoma.

What the Yonder drew from this report, however, is how quickly higher farm prices spread into the entire rural economy. Revenues rise and the money is quickly spread to banks, seed dealers and equipment sellers.

It is a perfect example of what Yonder contributor Richard Oswald wrote a few days ago. He was musing that when Citibank needed an infusion of cash, the bank got the money from the oil-rich government investment arm of Abu Dhabi.

“When Americans buy petroleum, the Saudis buy Citigroup,” Oswald wrote. “When Americans buy ethanol, farmers buy John Deere.” That sums up this latest report from the Fed perfectly.

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