Ability of Agricultural Bankers to Forecast Farm Income and Expenditures

The Federal Reserve System conducts a quarterly survey of agricultural banks. The purpose of the research was to evaluate the ability of bankers to accurately forecast farm income and expenditures of farmers in the Ninth Federal Reserve District. There have been studies to assess the accuracy of the bankers’ forecasts of factors such as loan repayment levels and land values, but there has not been a study of farm income and expenditures. Another purpose was to look at whether agricultural bankers can apply the same insight at the state level to determine income and expenditure patterns. Quarterly data from the Federal Reserve Bank of Minneapolis, the Bureau of Economic Analysis, and the South Dakota Department of Revenue, spanning from the first quarter of 2002 to the second quarter of 2012 were used. A combination of forecast evaluation methods such as Brier’s Probability Score and Yates Decomposition were used in evaluating the bankers’ forecasts. The results suggest that bankers in the Ninth District have expert knowledge of their client businesses. They are able to accurately forecast 86% of the movement of farm income, 88% of capital spending and 90% of household spending. Similar high performance is observed at the state level. The outcome of the study is significant to bankers, because having an early indication of future movements in income of farmers will assist bankers as they manage their loan portfolios. Farm machinery manufacturers and dealers can rely on the outcome of this study to make sound inventory decisions. Related agribusinesses may also better understand how farm income and spending may be related. Policymakers may likewise understand how movements in the agriculture sector may affect the overall economy