The Chicago Fed’s quarterly survey of 219 bankers also
showed prices of good farmland rose 4 percent in the first
quarter of 2013, from the fourth quarter of 2012. That compares
to a 5 percent gain over the same period a year ago.

“Signs of moderation in farmland value gains emerged,” the
bank said of its district, which includes most of Iowa,
Wisconsin, Michigan and northern Illinois and Indiana. “That
said, the year-over year increase in agricultural land values
was 15 percent in the first quarter of 2013, nearly matching the
annual gain of 2012.”

The land price trends mirror what was reported on Wednesday
by the Kansas City and St Louis Federal reserve banks for the
first quarter. The Kansas City district, like the Chicago Fed’s
district, are closely watched as barometers of the overall farm
economy, one of the bulwarks of the U.S. economy.

The U.S. Agriculture Department estimates that U.S. farm net
asset values will surpass $2.4 trillion in 2013, with more than
80 percent of that value tied up in farm land.

The Chicago Fed’s district is dominated by corn and
soybeans, the two biggest row crops in the United States, but is
also home to a big hog and dairy industry. Such livestock
producers have felt the strain from record grain prices in
recent years and some of that strain on farm finances may have
carried over to weakness in land values. Pockets of the Midwest
saw some land values ease, with Wisconsin land prices easing 3
percent from year-ago, the Chicago Fed said.

“Even though the numbers remain pretty large for much of the
district there were some pockets that were starting to show
decreases in land values,” David Oppedahl, the bank’s economist
in charge of the survey, said in an interview. “Whether that’s
just an aberration or not is yet to be seen.”

“The weakness in some sectors like dairy might account for
part of that and the general trends in prices over the next
season are looking to be lower. So there’s not going to be as
much support for higher farmland values going forward,” he
added.

Overall district land values were steady to higher on the
prior quarter and a year ago, the survey said, buoyed by record
grain prices and crop insurance payments.

“There was higher demand to purchase farmland in the three-
to six-month period ending with March 2013 compared with the
same period a year ago,” the Chicago Fed said. “The supply of
farmland was higher too.”

A little more than one-third of survey participants reported
that farmers increased their share of farmland acres purchased
in the three- to six-month period ending in March 2013 versus
the same period a year earlier, while 62 percent saw no change,
according to the bank survey.

Looking ahead, the Chicago Fed said that lower crop prices
could slow the upward trend in farmland values. For the second
quarter of 2013, 19 percent of bankers surveyed predicted
farmland values to increase, while 4 percent expected them to
decrease; the vast majority anticipated farmland values to be
stable.

That outlook was based on recent favorable, wet weather that
has replenished soils and sub-soil moisture throughout most of
the northern Corn Belt, the bank said.

“Heavy precipitation has delayed planting this spring, in
sharp contrast with last year, when planting occurred ahead of
schedule. That said, the rains have revitalized much of the
subsoil. During last year’s drought, subsoil moisture played a
key role in preventing even deeper losses in agricultural
output,” the bank noted.

The continuing strength in Corn Belt farmland prices kept
improving the values for cash rents in the district and overall
credit conditions for farmers.

“At 161, the index of funds availability nearly matched last
year’s record, with 61 percent of the survey respondents
reporting their banks had more funds available to lend and under
1 percent reporting their banks had less. The index of repayment
rates for non-real-estate farm loans moved up to 143 for the
first quarter of 2013 – its highest value since setting a new
high a year ago; 47 percent of the responding bankers reported
higher rates of repayment and 4 percent reported lower rates,”
the Chicago Fed said.

The rise marked the third straight year of double-digit
annual increases, setting a survey record, the bank said, but
the rate of gains moderated from the fourth quarter, with slower
growth in farm income.

Irrigated farmland attracted the most interest. Values rose
21.5 percent, boosted by lingering concerns after the worst
drought to hit the United States since the 1930s, the Kansas
City Fed said in its quarterly survey of 223 district bankers.

Ranchland values jumped 14 percent.

The quarterly survey is a closely watched gauge of the U.S.
farm economy. Skyrocketing land values, the basic collateral for
most farmer loans, have stirred fears of the possibility of a
ruinous bubble like the one in the 1980s, when overleveraged
farmers lost their land as interest rates jumped.

But farmers, especially of grain producers, are in a much
stronger financial position now than 30 years ago after several
years of record exports of and prices for their crops.

The Kansas City Fed district stretches across the major
wheat, corn and cattle states of Colorado, Kansas, Nebraska,
Oklahoma and Wyoming, along with parts of New Mexico and
Missouri.

SLOWING GROWTH

Compared with the fourth quarter, the frantic pace of
farmland price gains moderated, the bank said.

“After rising 7.7 percent and 9.0 percent in the first
quarter of 2012, the value of nonirrigated and irrigated
cropland rose 3.4 percent and 2.9 percent, respectively, in the
first quarter of 2013,” the bank said. “Cropland value gains
slowed compared with last year due to falling crop prices and
rising input costs.”

The western half of Missouri posted the biggest jump in land
values, with nonirrigated farmland prices up 28 percent from a
year earlier, the Kansas City Fed said.

Also on Wednesday, the Federal Bank of St. Louis issued its
first-quarter survey for farmland in the southern Midwest and
Midsouth.

Bankers said farmland values fell 2 percent from the fourth
quarter, but the survey provided no year-earlier comparisons
because this was only the bank’s fourth quarterly survey.

The St. Louis Fed district includes eastern Missouri,
Arkansas, southern parts of Illinois and Indiana, western
sections of Kentucky and Tennessee, and parts of northern
Mississippi.

The survey showed bankers thought land values and cash rents
would continue to rise, although they have tempered their
expectations, the St. Louis Fed report said.

“Fewer responses indicate that agricultural land values will
continue to climb over the next quarter,” the bank said.

The Chicago Federal Reserve, which surveys bankers across
the heart of the Midwest Corn Belt, plans to release its banker
survey later Wednesday.

Bankers in the Kansas City Fed district said record land
prices raised debt obligations for young and beginning farmers
and producers expanding their operations. Bankers also indicated
that livestock producers were more highly leveraged due to
recent losses accentuated by the 2012 drought.

“Producers appeared to be taking advantage of record low
interest rates to finance capital purchases but were using cash
to cover operating costs, limiting overall operating loan
demand,” the bank said.

Loan repayment rates remained higher than in 2012, but
bankers expected the pace of improvement to slow due to rising
production costs and forecasts for lower farm income.

“Some bankers expressed concern that a downturn in farm
income or land values could impact the ability of more leveraged
operations to meet debt obligations, particularly for borrowers
using land as collateral on other loans,” the bank said.

“In 2013, historically high farm incomes are projected to
keep U.S. farm debt and leverage low. Yet longer-term
projections suggest that farm incomes could fall dramatically in
2014,” the study, entitled “The Wealth Effect in U.S.
Agriculture,” stated. “If agriculture’s historical wealth effect
holds true, farm enterprises might use existing wealth to
finance and smooth investment spending, sowing the seeds for
another round of debt accumulation.”

The authors, Kansas City Fed Vice President Jason Henderson
and Kansas City Fed economist Nathan Kauffman, cautioned that
“the stage is set for another wealth effect and leveraging cycle
in U.S. agriculture.”

On the one hand, they said, expanding global population and
rising incomes in developing nations are boosting demand for
agricultural commodities. Farmers in top exporters like the
United States – the largest grain exporter – have been
increasing production through capital investments in equipment,
irrigation and storage.

“As a result, projections of farm profits indicate that the
combination of rising supplies and higher production costs could
cut farm profits by 2014,” the study said.

Looking at past farm booms and busts, such as the 1910-1920
and 1970-1980 periods, U.S. farmers built debt even as incomes
fell and interest rates rose. By contrast, with the record grain
prices of recent years, fueled not just by hungry overseas
buyers but the domestic biofuels boom, grain farmers have reaped
not just record profits but retired debt – and seen asset values
soar as land prices set new records. But that overall wealth
effect is a warning sign, the authors say: farmers tend to
accumulate more debt when wealth levels are high.

“High wealth levels increase the amount of collateral
available to underpin farm borrowings,” the Fed study notes.
“Today, an increase in farm debt may signal the beginning of
another turning point in farm debt and leverage. After rising
less than 1 percent annually since 2008, farm debt outstanding
at commercial banks rose roughly 5 percent in the fourth quarter
of 2012 for both real estate and non-real-estate debt.
Similarly, Farm Credit System lending for real estate mortgages
and production and intermediate-term loans rose 5.7 percent
during 2012.”

That bodes ill for farm solvencies, the authors say, given
prospects of lower farm incomes and higher interest rates.

After posting record highs the past two years, U.S.
government projections suggest farm profits will erode over the
next decade, the study notes. With a return to more normal
weather, a rebound in U.S. and world grain production is
expected to build supplies – and pressure prices. Combined with
other types of farm production, the USDA projects U.S. net farm
incomes to fall 20 to 25 percent below 2013 highs during 2014
and remain near these levels over the next decade, the authors
say.

At the same time, the Federal Reserve has said that interest
rates could begin to rise during this period of lower incomes.
Currently, most of the Federal Open Market Committee (FOMC)
members of the Federal Reserve indicate that keeping the fed
funds rate below 1 percent is appropriate policy through 2014,
the study notes. “However, there is less consensus on future
interest rate policy, as some FOMC members indicate that the fed
funds rate should rise above 3 percent by 2015,” it says.

“History has shown that a combination of falling profits and
rising interest rates drive farmland prices lower,” the study
states. “History also has shown that when land values and farm
wealth fall, solvency issues and farm bankruptcies rise.”

The authors caution against the certainty of such long-term
projections. They note that current farm debt ratios remain near
historical lows. Yet projections of lower farm incomes, high
wealth and low interest rates “are the recipe for another wealth
effect in U.S. agriculture.”

The lesson for farmers, the authors say, is to preserve
capital and not go overboard on debt to guard against a sudden
fall in asset values like land.

“Working capital is the first line of defense farmers can
use to manage through periods of weak profitability,” the study
said.

A series of storms in the past month brought several feet of
snow and much needed moisture to the central United States,
replenishing parched soils and filling low rivers just as the
U.S. planting season nears. Moisture is near normal for farms
east of the Mississippi River, the dividing line of the western
and eastern Corn Belt. But the west has not been as fortunate.

The weekly U.S. Drought Monitor, which last summer rated
two-thirds of the U.S. land mass in “moderate to exceptional”
drought, on Thursday showed drought areas shrank since December.
But 51 percent of the country was still rated as having moderate
drought conditions or worse as of March 19.

“We’ve certainly made a significant improvement to the
agricultural drought over portions of the Midwest, particularly
the Corn Belt – Iowa, Illinois, Indiana, Missouri and even
portions of eastern Kansas and Nebraska,” said Mike Hudson, a
meteorologist with the National Weather Service.

“But the long-term drought is still hanging on very strongly
over portions of western Kansas and western parts of the wheat
belt up to the Dakotas and Nebraska,” he added.

The United States for decades has been the largest exporter
of wheat, corn and soybeans, with most of those crops grown in
the Midwest and central Plains. Last year’s drought was the
worst in more than 50 years and cut into the role of the United
States as the world’s breadbasket, with Brazil now seen as the
top soybean exporter.

Ground zero for crop watchers is now the fourth largest U.S.
corn state, Nebraska, which is also a leading producer of
cattle, wheat, sorghum (milo) and ethanol. More than half the
state depends on irrigation to support its corn crop. Even with
irrigators running around the clock last summer, corn output
dropped 16 percent compared to the previous year.

“We are in much worse shape right now than we were this time
last year. It’s going to take an incredibly wet period for the
next couple months for us to have a chance to escape the type of
damage we incurred last year because we have less soil moisture
to start off with,” Al Dutcher, Nebraska state climatologist,
said in an interview.

“Even with normal precipitation we could see impacts as
aggressive as last year because there just isn’t any available
moisture,” he added. “We are hitting a critical time.”

This weekend another storm is expected to move through the
center of the country, dumping up to a foot of snow in a stretch
from Kansas to southern Indiana. Melted precipitation would be
one-quarter to one-half inch of moisture, amounts far below what
is needed to replenish soils, climatologists say.

Nebraska monitors soil moisture at 50 stations across the
state. Late winter storms provided enough precipitation to help
soil moisture 12 inches deep in east central and south east
Nebraska, Dutcher said, but soils remain rock hard two feet
below the surface.

“As you move north and west of this area most locations have
less than an inch of available moisture,” Dutcher said.

While 96 percent of Nebraska is still rated in extreme to
exceptional drought, South Dakota and Kansas are under similar
stress. Two-thirds of South Dakota and Kansas – major wheat,
corn and cattle states – are in extreme to exceptional drought.

The most immediate impact of the continued dryness is on
pastures for cattle to graze and on the hard red winter wheat
crop – the main U.S. bread wheat — as it comes out of dormancy.

Kansas has had 70 percent of normal precipitation since
September, which comes on the heels of last summer’s drought.

“What you are seeing is mainly surface improvement, but it’s
not enough to sustain even the wheat crop for its final maturity
and certainly not enough to do anything for the spring crops
like corn or soybeans or milo. We’ll take it but we’ve got a lot
more improvement to go,” said Kansas climatologist Mary Knapp.

Iowa, the top U.S. grain state, has seen moisture but its
northwest corner remains rated in severe to extreme drought.

WEST VERSUS EAST

Unlike the western Corn Belt, soil moisture east of
Mississippi River has largely recovered.

“For Illinois we are in really good shape right now thanks
to late season winter storms that brought us a little extra
moisture, either snow or rain,” said Jim Angel, the state
climatologist for Illinois, the second biggest grain state.

“The state as a whole is two or more inches above average
for this year through this date. We were about two to three
inches below average last year. It’s a night-and-day difference
between the two winter time experiences.”

“The only thing we can say with some degree of certainty is
we’re going to have a slower start to the growing season,” Angel
said, citing current cold soil temperatures.

So Nebraska remains the focus of 2013 drought fears.

The state would need to see 150 percent of normal rain over
the next six weeks, equating to six to seven inches of rainfall
in the east and four to five inches in the west, Nebraska
climatologist Dutcher said.

“The precipitation events that have occurred recently are
encouraging. Unfortunately the impacts of the 2012 drought year
pulled all moisture out of the profile. So the only moisture we
have going for us is right at the surface,” Dutcher said.

Dutcher added that he was also concerned about snowpack in
the Rocky Mountains, which may reduce river-based irrigation.

“Perfectly timed rainfall in an aggressive pattern for the
next six weeks can bring us back up to where we feel comfortable
that we would have a decent chance of hitting average yields,”
he said.

This was the seventh consecutive quarter irrigated and
non-irrigated cropland values posted year-over-year gains of
more than 20 percent as record crop prices kept demand hot for
farmland, according to a quarterly survey of bankers by the
Kansas City Fed released on Friday.

“What really stuck out in the survey was the difference
between irrigated and non-irrigated cropland values…irrigated
land is a way to protect from the possibility of these
droughts,” said Nathan Kauffman, a KC fed economist and one of
the authors of the survey.

“Persistent drought sparked a rush in irrigated farmland
sales during the fourth quarter of 2012. Stronger sales vaulted
irrigated cropland values in the District 30 percent above
year-ago levels, with a 13 percent jump in the fourth quarter
alone,” the Fed said of its survey, which draws on comments from
232 district bankers.

Non-irrigated cropland and ranchland posted strong annual
gains of between 20 and 25 percent.

The KC Fed district stretches across major wheat, corn and
cattle states of Colorado, Kansas, Nebraska, Oklahoma and
Wyoming along with parts of New Mexico and Missouri.

U.S. Plains farmland values:

Farmland values are closely tracked by government economists
as a gauge of the U.S. economy and health of the banking system.
In recent years both crop prices and farmland prices have set
records as the burgeoning biofuels industry and record food
exports spotlighted the value of hard assets.

In turn, farm income has also set records. But skyrocketing
land values have stirred banker fears about the possibility of a
ruinous farmland bubble like the one seen in the 1980s U.S. farm
crisis, when over-leveraged farmers lost their land when
interest rates jumped.

“Farm prices are high, but so are commodity prices and
interest rates are very low. Those are the two biggest
determinants of what farm ground should sell for,” said Phil
Burns, chief executive of F&M Bank in West Point, Nebraska. “The
question becomes how sustainable are either or both looking
longer term? In the short term everything looks fine.”

The Kansas City district survey comes after fourth quarter
surveys earlier this week from the St Louis and Chicago Fed
banks. The latter two surveys covered the northern Corn Belt and
central Delta states, with both reporting similar results -
strong farm income aided by crop insurance and strong farm
spending for land and equipment, partly due to year-end doubts
about higher taxes in 2013.

Farmers remain the predominate land buyers, accounting for
three-fourth of the sales in the Plains in the fourth quarter.
Bankers said farmers used more cash to finance purchases
compared to a year ago. Nonfarmers continued to buy land for
investment purposes.

“Almost all recent auctions were sold to the largest farmers
in the area wanting to get bigger. The buyers are strong and
most are cash sales,” said one banker from northwest Missouri.

Cash rental rates also surged in the quarter, with irrigated
cropland up 20 percent and non-irrigated rising more than 14
percent.

FARM INCOME STRONG DESPITE DROUGHT

Farm incomes rebounded in the quarter despite expectations
that drought would hurt profits, the KC Fed said.

“Crop incomes remained high, as farm operations with
irrigated cropland had less yield loss and sold crops at high
prices, while many farm operations without irrigation received
crop insurance payments, mitigating losses,” the bank said.

Following the autumn harvest crop prices eased back as
export demand weakened and ethanol production slowed, providing
some relief to livestock producers through lower feed costs.
Significantly, cattle and hogs firmed in the quarter improving
profits in the livestock sector toward the end of 2012. The
district contains the top cattle feedlot states, with the
exception of Texas.

Higher farm incomes boosted capital spending and led to
improved agricultural lending conditions, although overall loan
demand remained low with many grain farmers flush with cash.
Loan repayment rates increased at a pace on par with a year ago
while interest rates for operating and real estate loans edged
lower, the bank survey said.

“Although fourth-quarter incomes were better than expected,
bankers expressed concerns that drought could affect some areas
further in coming months. Farm incomes were expected to drop in
Kansas and Oklahoma, as pasture conditions generally remained
poor due to ongoing drought. But strong farm incomes were
expected to continue in areas with sufficient water
availability,” the Fed said.

“Water scarcity led to differing farm incomes and
farmland-value gains by state,” the bank added.

The Chicago Fed’s quarterly survey of bankers showed prices
of good farmland in the October-December period notched the
third largest year-on-year increase since the late 1970s.
Farmland values gained an average 7 percent from the prior
quarter.

In 2012, an index of inflation-adjusted farmland values once
again established a record for the regional district, as it has
every year since 2007, the bank said.

“Toward the end of 2012, the increases in farmland values
seemed to pick up their pace … amid reports of strong farmland
sales in the face of impending and uncertain changes in federal
tax policies,” the bank said of its survey, which draws on
comments from 212 district bankers in Iowa, northern Illinois
and Indiana as well as parts of Wisconsin and Michigan.

Farmland values in the central United States are closely
tracked by government economists as a gauge of the U.S. economy
and health of the banking system.

In recent years, both crop prices and farmland prices have
set records as the burgeoning biofuels industry and record food
exports spotlighted the value of hard assets. In turn, farm
income has also set records.

The Chicago district survey follows the St. Louis Fed
quarterly update, which reported strong farm income and land
values on Wednesday. The Kansas City Fed will issue its survey
on Friday.

“Perhaps the most surprising aspect of 2012′s strong gain in
farmland values was that it occurred in the midst of the worst
drought in the Midwest since 1988. Although by some measures
last year’s drought was more severe than 1988′s, the losses at
harvest in 2012 were not as significant as those experienced in
1988,” the Chicago Fed said.

The district produces about a third of all U.S. corn and
soybeans as well as soft wheat, sorghum and other crops. It also
has leading swine and dairy operations. USDA has estimated the
district’s corn harvest was the lowest since 2002 and soy
harvest lowest since 2007.

But the bank said crop insurance and drought-induced jumps
in grain prices buoyed farmer returns, with corn and soybean
prices up about 11 percent on average from 2011.

The flip side of that strength hit livestock farmers the
hardest as soaring feed costs and lower milk and hog prices
stressed producers.

“The squeeze on livestock producers was evident in the most
recent estimates of farm assets by the USDA. Following a 3.6
percent slide from 2011, the 2012 value of the national stock of
livestock and poultry was the lowest in real terms since 1960,
when the data start,” the Fed said.

Still, for farm bankers the overall strength in grain farmer
returns in 2012 continued to outweigh losses or liquidations
from loans from livestock operations, the Fed said.

Credit conditions improved in the fourth quarter and
additional funds were available to lend, with bank deposits
boosted by crop sales and insurance indemnities.

“As of early February 2013, $3.93 billion had been paid out
for insured 2012 agricultural losses in the five District states
(29 percent of the U.S. total of $13.7 billion),” the Fed said.

BANKERS MORE CAUTIOUS, TIGHTEN CREDIT

But bankers were growing more cautious, according to the
survey, with interest rates remaining at record lows.

Almost 20 percent of the banks surveyed tightened credit
standards for ag loans in the fourth quarter of 2012 versus a
year ago while just 1 percent eased credit standards. Ten
percent of the banks raised the amount of collateral to qualify
for non-real estate farm loans, the Fed said.

Non-real estate farm loans were expected to contract in the
first quarter of 2013. The exceptions were operating loans,
which were predicted to expand, and farm machinery loans, which
were forecast to hold steady. Bankers also expect a higher
volume of real estate farm loans.

Farmers’ capital expenditures – including spending on
machinery and equipment, trucks and autos, and buildings and
facilities – were forecast by respondents to be even higher in
2013 than in 2012.

The survey showed that while 71 percent of bankers expected
farmland values to be stable from January to March, 28 percent
expected values to increase in the first quarter.

“With the USDA predicting net farm income to rise 14 percent
from 2012 to $128.2 billion in 2013, there would seem to be at
least another leg to be run as farmland values continue their
upward race,” the bank concluded.

Drought severity had diminished in much of the central
Midwest following the harvest, giving more hope for a rebound in
crop yields. Recovery from the drought will remain a key factor
in 2013, as the movements of drought influenced crop prices will
affect both crop farmers and livestock producers, the bank said.

“The District’s relatively strong performance in the fourth
quarter contrasts sharply with the widespread anticipation in
the previous survey that last summer’s drought would
significantly lower income and capital spending,” the bank said,
based on its survey of 61 agricultural banks. “Many bankers
cited the effect of crop insurance in alleviating the expected
negative impact of the drought.”

The bank’s Eighth District covers the southern half of
Illinois, eastern half of Missouri, Arkansas, northern
Mississippi and western Kentucky and Tennessee – a big wheat,
corn, soybean and cotton region.

The U.S. Department of Agriculture estimates that crop
insurance claims from last year’s drought, the worst in half a
century, will reach $21 billion nationally.

“Illinois farmers have been the recipients of 23 percent of
the $13.7 billion in claims that have already been paid out on
the 2012 crop,” the Fed survey said.

The Fed said that district bankers continue to report an
upward trend in land values and cash rents.

“Compared with the previous quarter’s survey, bankers
reported that land values (quality farmland, ranchland or
pastureland) increased by an average of 4 percent,” the bank
said. “As in our previous two surveys, bankers expect land
values and cash rents to continue to rise.”

FARM BOOM HANGS OVER FARM BILL DEBATE

The USDA on Monday said that 2013 U.S. net farm income is
expected to rise about 15 percent to $128.2 billion, based on
booming grain and meat exports as well as biofuels demand. Those
fundamental factors have driven a six-year commodity boom and
led to record grain and farmland prices. But that outlook for
farm wealth is hanging over congressional wrangling that has
delayed a new 5-year farm bill, analysts say.

“American agriculture continues to endure an historic
drought with tremendous resolve, and last year was an important
reminder of the need for a strong safety net,” U.S. Agriculture
Secretary Tom Vilsack said.

The St. Louis district survey will be followed by quarterly
banker updates from the Chicago Federal Reserve on Thursday, for
the central and northern Midwest and the heart of the Corn Belt,
and from the Kansas City Fed on Friday for the central and
southern Plains states, the top hard wheat and cattle region.
The reports are followed closely by the central bankers and
policymakers, given the importance of the farm economy for U.S.
growth. U.S. farm assets are expected to top $2.7 trillion in
2013 with farm equity rising to $2.46 trillion, according to
USDA.

The St. Louis Fed said district spending was firm in the
fourth quarter but may soften from that pace in early 2013.

“With fourth-quarter income at higher-than-expected levels,
household spending, outlays for capital expenditures, and loan
repayment rates in the fourth quarter were also stronger than
expected across the District. By contrast, loan demand, while
still positive, turned out to be a bit softer than initially
expected,” the Fed said.

“For the District as whole, bankers also expect household
spending to remain close to year-ago levels, but lean toward a
decrease in capital spending in the first quarter of 2013
relative to a year ago,” the bank said.

Tax provisions allowing accelerated depreciation on
qualifying farm asset purchases expired at the end of 2012,
which may have contributed to the boost in farmer spending on
equipment and to general agricultural bank lending in the fourth
quarter. Rising fertilizer and seed costs also enticed some
farmers to pre-pay for 2013 inputs, it said.

For farmland transactions, district bankers said about 73
percent of land in the fourth quarter was bought by farmers,
with most of the rest by investors for leasing rather than
residential or recreation purposes.

“Bankers indicated strong competition between commercial
banks and the Farm Credit System to finance the land purchases,
with a slight edge toward the Farm Credit System,” the Fed said.

(Reporting by Christine Stebbins; Editing by Peter Bohan,
Maureen Bavdek and Dan Grebler)

Industry officials said CME is looking for a way to strike a
balance between international grain companies that want shorter
hours and small rural grain elevators that like longer trading
hours.

CME finds itself squeezed by two competing voices. Grain
giants like Cargill, ADM, Bunge and
Louis Dreyfus, which hedge millions of bushels every
day, want shorter hours to save on staffing costs, avoid trading
risks from thin volumes outside U.S. daytime hours, and profit
on cash market trading.

But hundreds of smaller grain handlers known as country
elevators like having the exchange open to hedge price risk at
odd hours. These are usually the first point of sale for grain
farmers.

Last week, CME reversed a policy it put in last May that
expanded hours at its Chicago Board of Trade grain market to 21
from 17, saying it would now cut hours. But CME said it was
“continuing to vet alternatives with our customer base” and
hadn’t made a decision on trading times.

CBOT grain markets are now closed just three hours a day
from 2 p.m. to 5 p.m. CST, a huge contrast to decades of “pit”
trading that lasted less than four hours (9:30 a.m. to 1:15
p.m.). In 1995, an electronic-only night session, open from 6
p.m. to 7:15 a.m. was added to draw business from big grain
buyers in Asia and Europe.

Volumes on the night session have always been lower than
U.S. daytime hours, when cash grain transactions in the world’s
largest grower lead activity. Nevertheless, CME last May again
expanded hours, saying it needed to stay competitive with new
grain contracts listed on CME’s rival, the all-electronic
IntercontinentalExchange.

ICE grain volumes, however, remain minuscule. The grain
trade has stayed at CBOT for the liquidity, and trade patterns
show that a narrow few hours of the day still dominate.

LONGER HOURS EMPOWER SMALL ELEVATORS

CME declined comment, but grain traders said CME is
weighing proposals that include cutting hours back to 9 a.m. to
1 p.m. and then 6 p.m. to 6 a.m., or a cycle that opens at 6 or
7 p.m. each evening and closes the next day at 1 p.m. (all times
CST).

“It’s fine with me if they want shorter hours, but at least
keep them open between 7 a.m. and 2 p.m. so these guys can get
their grain hedged and lock in some margins and profits,” said
Mike Hall, a futures broker who works with many Midwest farmer
co-ops and country elevators and wrote a letter to the CME this
week.

“Most commercial grain business takes place between 7 a.m
and 4 p.m. With some of the ideas being floated – you’re back to
limiting these guys to only four hours to hedge,” Hall said. “It
seems to me that the exchange is disenfranchising these people
from the whole idea why the Chicago Board of Trade was started,
for the producer and handler to transfer his risk.”

Hall and others said country elevators, buying grain when
CBOT markets are shut, often end up calling the big firms like
ADM or Cargill and re-sell the grain on a fixed or “flat priced”
basis, dodging the risk of un-hedged ownership but giving up the
chance to profit from holding grain longer.

“Along come these longer hours,” Hall said. “They’ve gotten
used to them, their margins and profits are a little more
stable. And now you’re going to take that away from them?”

But big international firms say the longer hours have meant
increased staffing costs, more price risk with thinner volumes,
and more clearing costs.

“I get the fact that they want it accessible to the entire
world. But if you’re open from 6 p.m. to 6 a.m., that’s more
than enough coverage for Asia. And Europe, the later close only
puts a greater strain on them because they need to follow it
later into their evening,” said one export trader with a
multinational company who wants shorter hours.

A trader from an international brokerage summed up the
current debate this way: “If Cargill, ADM, and Dreyfus don’t
like the longer hours, we’re not going to have longer hours.”

Spokesmen for Cargill, ADM and Louis Dreyfus could not be
reached or declined to comment on the debate of trading hours.

The National Grain and Feed Association, the largest U.S.
grain handlers trade group representing more than 1,000 grain
handlers and processors of all sizes, said there was a wide
diversity of opinion among its members and it did not yet have a
formal recommendation on hours.

“When you consider all the costs and the different tradeoffs
the best solution may not be exactly what all country elevators
want and not exactly what firms staffing longer hours would
like,” said Diana Klemme, vice president of Grain Services Corp
and a member of NGFA’s risk management committee.

The CME, trying to accommodate all market players, remains
caught in the middle. It’s a familiar place.

Grain traders have complained for years that CME is losing
grain hedgers by catering to Wall Street banks and hedge funds
who drive speculative volumes but disrupt hedging.

CME, which has reaped higher trading fees from the volumes,
says it is must fend off competition from ICE.

Grain traders don’t buy that argument. Open interest in
ICE’s flagship corn contract has fallen 65 percent to fewer than
800 contracts in the past two months. Open interest in CBOT
corn, meanwhile, has risen to over 1.2 million contracts.

Scott Docherty, general manager of Top Flight Grain, a
cooperative that buys some 30 million bushels a year from
Illinois farmers, sympathizes with CME’s attempt to please all
parties.

“What concerns me is they haven’t even given it a full year
to look at what their changes have done for the customers,”
Docherty said.

Jeff Sprecher, whose $8.2 billion deal to buy the Big Board parent took markets by surprise in late 2012, said he is not considering any offers.

“We have received calls from other exchanges,” Sprecher told Reuters in an interview on the sidelines of the Commodity Markets Council’s annual meeting of exchange leaders and their customers. “It’s not ICE’s business to sell. We only have an agreement to buy it, but it’s subject to a lot of approvals and shareholder votes. It’s not a done deal so it’s not even my position that I could even entertain those type of conversations.

He did not say which exchanges had made inquiries.

Three sources close to ICE told Reuters earlier in January the Atlanta-based exchange operator would consider a sale of Euronext for the right price.

The NYSE unit includes the Paris, Amsterdam, Brussels and Lisbon stock exchanges.

On Monday, Sprecher appeared to disavow such a move, reiterating the company’s plan to turn the Euronext into an independently governed entity.

The idea of separating the European stock-exchange unit from the merged ICE-NYSE business was put forward in order to help win approval for the deal from regulators, who have tripped up prior attempts at mega-mergers in the exchange world.

Last year, the Justice Department blocked an $11 billion joint hostile bid by ICE and Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) on concerns that the tie-up would dominate U.S. stock listings. A rival $9.3 billion bid by Deutsche Boerse AG (DB1Gn.DE: Quote, Profile, Research, Stock Buzz) ran afoul of European regulators.

An ICE regulatory filing on Monday underscored the importance of avoiding such an outcome, noting that the draft merger agreement proposed a “hell-or-high-water” obligation to obtain regulatory approval and that termination fees be available to NYSE if ICE failed to consummate the deal.

The offer to spin Euronext off as a stand-alone company was seen as a way to help convince European regulators that the deal between the two U.S. exchange operators would not affect market interests in Europe.

“I don’t think ICE or me as an American should make the determination who the better partner should be” for Euronext, Sprecher said. “I think it’s better that we give Euronext an independent valuation and board and governance and let European interest decide how best to organize in Europe.”

Duncan Niederauer, NYSE’s CEO, has also ruled out a sale.

(Writing by Ann Saphir and John McCrank; editing by Matthew Lewis)

“The U.S. cattle herd is at its lowest level since 1952.
Increased feed costs resulting from the prolonged drought,
combined with herd liquidations by cattle ranchers, are severely
and adversely contributing to the challenging business
conditions we face as an industry,” John Keating, president of
Cargill Beef, said in a statement.

The company also cited an over capacity in beef processing
in the Texas Panhandle, where Cargill operates two of the four
beef processing plants there.

Shares of rival beef producer Tyson Foods Inc rose on
Thursday as one less beef plant should benefit the industry.

“Industry capacity utilization rates in beef packing have
been deteriorating in recent years thanks to fewer available
cattle. With a big plant out of commission, capacity utilization
rates should rise and packers should gain some leverage,” JP
Morgan analyst Ken Goldman said in an email.

Meat industry analysts and economists have speculated for
months that the smaller cattle herd, due to three years of
severe dryness in top cattle states of Texas and Oklahoma, would
force at least one packing plant to close this year.

Cattle previously sent to the Plainview plant, which
processes about 4,500 head per day, will be diverted to
Cargill’s beef plants in at Friona, Texas; Dodge City, Kansas,
and Fort Morgan, Colorado.

“That will more consistently provide a 40-hour paycheck for
15,000 people in our beef business. We intend to maintain our
position in the marketplace,” Cargill spokesman Michael Martin
said in response to an e-mail request.

The company’s regional beef facilities at Fresno,
California; Milwaukee, Wisconsin; and Wyalusing, Pennsylvania,
as well as its beef plant in Schuyler, Nebraska, and two beef
plants in Canada are not affected, Cargill said.

“We are retaining the Plainview plant and property with the
hope that someday there will be a need for additional processing
capacity in the region, but we do not foresee that happening for
a number of years,” Martin said in the statement.

Cargill plans to layoff some of the plant’s 2,000 employees
with others filling positions at other company locations or with
other employers.

The smaller cattle herd has had beef processors competing
for cattle and paying historically high prices for them. While
beef prices have increased, they were still not high enough to
offset the cost of the cattle, analysts said.

“It’s simply that packer margins have been in the red pretty
consistently since early last summer,” said Dan Vaught, an
economist with Doane Advisory Services in St. Louis, Mo.

“The industry was waiting on someone to blink, and it turns
out to be Cargill,” he said.

HedgersEdge.com, a Colorado-based livestock market advisory
firm, put the average beef packer margin for Thursday at a
negative $36.95 per head, compared with a negative $46.90 on
Wednesday and a negative $66.75 on Jan. 10.

Shares in Tyson Foods Inc were up 4.1 percent at
$21.30 in afternoon trading on the New York Stock Exchange.