By Dave Natzke
If they haven’t been in the market for a while, dairy producers looking for land may be in for some sticker shock, based on quarterly surveys from Federal Reserve Bank district lenders.
Average farmland values (see Table 1) in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan, Minnesota and Wisconsin) increased 6% in the fourth quarter of 2010, according to David Oppedahl, business economist, writing in the bank’s quarterly AgLetter. The quarterly gain matched the largest rise in any quarter since 1977.
Since district farmland values bottomed in 1986, the compound annual growth rate for farmland values (adjusted for inflation) has been 4%. The 12% annual (Jan. 1, 2010-2011) increase in district farmland values was the second-largest annual increase in the past 30 years. And, more than half of the survey respondents expected farmland values to keep rising during the first quarter of 2011.
Credit conditions in the district showed solid improvements for the fourth quarter of 2010, with more producers able to pay off loans and catch up on payments. Renewals and extensions of non-real estate ag loans fell, and repayment rates accelerated, including in dairy-heavy Wisconsin. However, Wisconsin still exhibited the highest rate (5%) of loans having major or severe repayment problems.
Agricultural interest rates decreased yet again in 2010’s fourth quarter (see Table 2). As of Jan 1, 2011, the average interest rates in the District were 5.85% for operating loans and 5.70% for farm real estate loans.
Looking forward, responding bankers anticipate higher volumes of operating, farm machinery and grain storage construction loans, as well as more loans guaranteed by the Farm Service Agency. They expect lower volumes for feeder cattle and dairy loans, although there was more hope for generating dairy loans in Wisconsin. The expected willingness of farmers to make renewed investments in land, buildings, machinery, equipment and vehicles indicated that the agricultural sector is rebounding rebounded from the recession. Now, an issue facing agriculture will be how to manage the volatility, Oppedahl said.
Solid harvests and soaring commodity prices were a boon in the Minneapolis Federal Reserve district (covering all or portions of Montana, North and South Dakota, Minnesota and northwestern Wisconsin). Farm incomes, capital spending and land values increased, according to Joe Mahon.
Cash rents and farmland values grew robustly. Irrigated farmland saw the largest gains in cash rents, with the average increasing 14.4% over last year, and the average land values increased 14.7%. Increases for irrigated farmland saw bigger gains in land values, up 16.6%, with a 10.4% increase in cash rents. Ranchland saw substantial increases for rents and values (up 5.3% and up 7.4%, respectively). Land values for all categories increased in every district state, with the sole exception of Montana ranchland. Cash rents varied more widely, from double-digit increases across all categories in Wisconsin, to a 2.5% decrease on irrigated farmland rents in Montana.
Increased incomes led to an increase in loan repayments, and renewals and extensions decreased. Loan demand was largely unchanged across the district, although a larger number of lenders said loan demand in Wisconsin declined.
Fixed and variable interest rates on loans for operating, machinery and real estate fell from their third quarter levels.
With booming farm income and robust demand, fourth-quarter farmland values soared 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 Jason Henderson, branch executive, and Maria Akers, assistant economist.
Cropland values posted double-digit gains from year-ago levels, and ranchland values recorded their sharpest increase in two years. Cash rental rates, however, rose more modestly. Compared to the fourth quarter of last year, the value of district irrigated and nonirrigated cropland jumped 14.8% and 12.9%, respectively, and ranchland values rose 9.2%.
Higher farmland values were fueled by strong demand from both farmers and nonfarm investors, despite a slight increase in the number of farms for sale. Bankers reported farmers remained the primary buyers of farmland, but many reported an uptick in investor purchases. Recreational or development use was cited less often than in previous years.
Compared to last year, cash rental rates rose more than 6.0% for cropland, and were up more than 4.0% for ranchland. With farmland value gains outpacing the increase in cash rents, some bankers were concerned values may not maintain their torrent pace.
Farm credit conditions improved and loan demand softened with higher farm income. More bankers reported lower operating loan demand, saying farmers used cash or vendor credit to pay for crop inputs and farm equipment. Survey respondents also noted an uptick in farm real estate cash transactions, and a rise in real estate lending by the Farm Credit System.
Bankers also commented on trends in farm real estate loans, including the process of determining prudent loan-to-value ratios. Farm real estate loan-to-value ratios ranged from 50% -90%, and the average was just over 70%. Three-quarters of survey respondents reported loan-to-value ratios at their bank had not changed in the last year; however, almost 20% of bankers indicated a decline in typical loan-to-value ratios used for farm real estate transactions. A few bankers mentioned loan amounts had been capped at a set dollar amount per acre, regardless of purchase price or appraised value.
Favorable yields and strong commodity prices helped producers finish 2010 strong, according to bankers responding to the fourth-quarter survey in the Federal Reserve Bank of Dallas, covering all or portions of Texas, New Mexico and Louisiana.
Cattle prices continued to increase, providing ranchers with solid profits, although very dry conditions were negatively impacting livestock and winter wheat producers. Limited winter grazing increased supplemental feeding costs.
Dryland and ranchland values were stable, while irrigated values rose slightly on the heels of the successful cotton crop. About one-quarter of the bankers expected farmland values to increase during the first quarter of 2011.
The generally strong crop and livestock performance in 2010 boosted loan demand and repayment rates, as both these indexes turned positive for the first time since mid-2008. Loan volume expectations remained weak for several loan types, although increased agriculture profitability led to an increase in farm machinery loans.
Compared to the previous quarter, interest rates on operating and machinery loans declined, but rates for real estate loans increased slightly.
• For quarterly updates on agricultural credit conditions and farmland values in specific Federal Reserve bank districts, visit: www.minneapolisfed.org/Research/data/district/usstates.cfm.