Have farmland values topped out?

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Federal Reserve Banks provided land value and credit condition summaries from fourth-quarter 2014 ag lender surveys. As always, state and district averages may not reflect local conditions.

 

Chicago

Fourth-quarter 2013 average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin) were up 3% on the quarter and 5% from a year ago. However, farmland value growth appears to be slowing, and some areas in even saw declines in farmland values, as corn and soybean prices tumbled from a year ago, according to David Oppedahl, business economist. The annual increase was the smallest gain since 2009 and the second-lowest gain of the past decade.

A majority of respondents anticipated farmland values to remain stable during the first quarter of 2014, but the rest of the respondents’ expectations tilted toward decreases in farmland values during this period.

Ag credit conditions weakened compared to a year earlier. Repayment rates on non-real-estate farm loans were lower, and rates of loan renewals and extensions were higher. Non-real-estate loan demand picked up from a year ago, as farmers had relatively more working capital during the intervening quarters.

Credit availability was somewhat more restricted than a year earlier, and 6% of reporting banks required larger amounts of collateral to qualify for non-real-estate farm loans during the October through December period of 2013 relative to the same period of a year earlier; 1% required smaller amounts. According to survey respondents, over 1% of their farm customers with operating credit in 2013 were not likely to qualify for new operating credit in 2014. In Wisconsin, over 3% were unlikely to qualify again.

In a major reversal from a year ago, farmers’ capital expenditures – specifically, expenditures on land or improvements, buildings and facilities, machinery and equipment, and trucks and autos – were expected by survey respondents to be lower in the year ahead. Over half of the responding bankers forecasted lower levels of capital purchases in each of these categories in 2014 than in 2013, and less than 10% forecasted higher levels.

As of Jan. 1, 2014, the average interest rate for farm operating loans edged up to 4.99%. Similarly, the average interest rate for agricultural real estate loans rose to 4.94%. The farm operating loan interest rate was still below its level of a year ago, whereas the farm real estate interest rate had matched its level of the second quarter of 2012.

 

Kansas City

Farmland markets have begun to cool in the Federal Reserve Bank of Kansas City (covering Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri), according to Nathan Kauffman, Omaha branch executive, and Maria Akers, associate economist. A growing number of bankers felt that farmland values had topped out and could retreat from current highs.

After several years of large increases, ag bankers in the district indicated cropland value gains slowed dramatically in the fourth quarter, and ranchland values declined slightly. Farmers continued to be the primary buyers of farmland, with most intending to expand their operations. However, the sharp slowdown in cropland price gains occurred despite there being less farmland for sale compared with last year. Looking ahead, more bankers expected farmland values to decline in 2014 while fewer expected prices to rise further.

Cropland cash rental rates also stabilized in the fourth quarter. When farmland values were surging in recent years, landowners often negotiated substantial increases in cash rents around year-end. In the fourth quarter of 2013, though, rental rates on District cropland remained largely unchanged from the previous year. However, ranchland cash rental rates rose moderately, especially for pastures that had recovered from drought.

The slowdown in farmland value gains and increases in cash rent occurred amid expectations of weaker farm income. Agricultural bankers reported farm income fell short of year-ago levels for the third straight quarter, primarily due to lower corn prices. Weaker farm income boosted loan renewals, and demand for new operating loans held at a five-year high as producers prepared for spring planting. Some bankers also were concerned low crop prices and high production costs could squeeze profit margins for their farm customers and potentially affect the performance of their agricultural loans.

The average fixed interest rate on farm operating loans has held below 6% for more than a year and the average fixed interest rate on farm real estate was about 5.4% throughout 2013. Despite heated competition for farm loans, agricultural bankers reported little change in collateral requirements.

 

Dallas

Bankers in the Federal Reserve Bank of Dallas (covering all or portions of Texas, New Mexico and Louisiana) continued to

report negative effects from drought, although some areas saw improved conditions resulting from recent rains.

 Farmland values in the fourth quarter were above year-ago values. Ranchland and irrigated cropland values increased more than 4% over last year, while dryland values were up about 2%. Overall, respondents continued to expect farmland values to trend up.

 Demand for agricultural loans continued to decline, as did loan renewals and extensions. Loan repayment rates increased again this quarter. Volumes for most types of loans continued to decrease. The exception was operating loans, with demand the same as fourth quarter last year.

Average interest rates (variable-rate loans) were: operating – 5.75%; intermediate – 5.71%; and farm real estate – 5.42%.

 

St. Louis

After falling modestly in the third quarter, quality farmland prices – as well as farm income – rebounded in the fourth quarter of 2013, according to bankers in the Federal Reserve Bank of St. Louis (covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee). Fourth-quarter farmland prices were up 12.2% from a year earlier. The fourth-quarter value of ranch or pastureland was up 5.2% from the previous quarter and 4.3% from the same quarter a year earlier.

Cash rents for quality farmland rose 5% from the third quarter; cash rents for ranch or pastureland also rose modestly.

While farmland values and income were up in the quarter, proportionately more respondents expect farm income and quality farmland values to decline over the first quarter of 2014. However, respondents see no change in average cash rents for ranch or pastureland. Respondents also expect farm household expenditures and farm equipment expenditures in the first quarter of 2014 to be lower than a year earlier.

A modest majority of bankers believe that a reduced federal mandate for biofuel usage will lead to some reduction in quality farmland values. The bankers also  believe lower-than-expected commodity prices in 2014, by far, pose the greatest risk to the farm sector.

The survey showed demand for farm loans in the fourth quarter of 2013 was modestly below a year ago, but respondents expect  demand will pick up in the first quarter of 2014. Interest rates on fixed-rate loans declined modestly from their third-quarter averages. By contrast, interest rates on variable-rate loans were up slightly from three months earlier. Average interest rates (variable-rate loans) were: operating – 5.01%; machinery/intermediate – 5.1%; and farm real estate – 4.93%.

 

Richmond and Minneapolis

Reports from Richmond and Minneapolis districts were not yet available.

 

District reports available

To see individual Federal Reserve district reports, go to these websites:

www.kansascityfed.org/research/indicatorsdata/agcredit/index.cfm?ealert=agcr0215

www.chicagofed.org/webpages/publications/agletter/index.cfm

• http://research.stlouisfed.org/publications/afm/

www.dallasfed.org/research/economy/ag.cfm

www.richmondfed.org/research/regional_economy/surveys_of_business_conditions/agricultural_credit/index.cfm

www.minneapolisfed.org/publications_papers/agcredit/index.cfm?


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