Finance: More than passing interest

Weak dairy and livestock economies leave an imprint on credit conditions and land values.

By Dave Natzke

Add land values to the things on the decline in major U.S. dairy states. USDA’s 2009 Land Values and Cash Rents report shows the value of agricultural real estate, cropland and pasture declined in most dairy states, but rental rates held fairly steady (see Table 1).

U.S. farm real estate values, a measurement of the value of all land and buildings on farms, averaged $2,100/acre on Jan. 1, 2009, down 3.2% from 2008 and the first decline since 1987. Regional changes ranged from virtually no change in the Northern and Southern Plains, to an 11% decline in the Mountain region. The highest farm real estate values remained in the Northeast, at $4,830/acre; the Mountain region had the lowest, at $922/acre. Among dairy states, largest declines (on a percentage basis) were in Idaho, Florida, California and Oregon.

U.S. average cropland values declined by $110/acre (about 4.0%) to $2,650/acre. Among major dairy states, largest cropland value declines (on a percentage basis) were in Arizona, Florida, Idaho and Virginia.

USDA economists cited the overall economy for the declines, resulting in less demand for commercial and residential development and recreational land in many regions. Livestock and crop commodity prices also declined, weakening producer and investor interest.

Cash rent

Nationally, cash rent for cropland rose 5.3%, while pasture rents remained unchanged for the 2009 crop and grazing year. Cropland cash rents paid in 2009 averaged $90/acre, compared to $85.50/acre for 2008. Pasture cash rents averaged $10.50/acre, consistent with 2008, but above the 2007 average of $10.00/acre.

USDA’s 2009 Land Values and Cash Rents report shows the value of agricultural real estate, cropland and pasture declined in most dairy states.

USDA’s 2009 Land Values and Cash Rents report shows the value of agricultural real estate, cropland and pasture declined in most dairy states.

Federal Reserve Bank districts

Second-quarter 2009 surveys of Federal Reserve Bank district lenders indicated land values were showing signs of stabilizing, but credit conditions deteriorated with cash flow.

In the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan, Minnesota and Wisconsin), average farmland values (see Table 2) were steady in the second quarter, but declined 3% from the previous year, according to David Oppedahl, business economist, writing in the bank’s quarterly AgLetter. In contrast with a year ago, corn and soybean prices have become a drag on farmland values, since the expected stream of earnings from crop production diminished.

Credit conditions in the district worsened, with loan repayment rates sliding to the lowest level since 2006. Loan renewals and extensions grew, and collateral requirements increased.

Interest rates hovered near the levels of the previous quarter (see Table 3), and bankers reported the Farm Credit System share of the ag loan market grew in the first half of 2009.

In the Minneapolis Federal Reserve district (covering all or portions of Montana, North and South Dakota, Minnesota and northwestern Wisconsin), a weak first quarter was followed by a second one not much better. The livestock sector – especially dairy – continued to suffer. Profitability the previous 3-5 years helped some producers absorb losses. Farm income, household spending and capital expenditures all decreased significantly in the second quarter, according to Tobias Madden, regional economist.

Loan repayments rates did not improve, while loan renewals and extensions increased. Loan demand increased slightly, as did collateral requirements. Interest rates stayed nearly constant; only variable loan rates for machinery increased.

Land values and cash rents were flat to lower in the second quarter.

District farmland values stabilized 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. Irrigated cropland and ranchland values posted slight increases.

Bankers in states with high concentrations of livestock operations expected lower farm incomes, contributing to a rise in loan demand and further declines in loan repayments. Farm interest rates held steady.

Persistent drought conditions added to the economic strain in the Federal Reserve Bank of Dallas (covering all or portions of Texas, New Mexico and Louisiana). Ranchers in the driest areas liquidated cattle herds at a loss because of limited water and forage availability and high supplemental feed costs. A higher share of bankers reporting a decline in loan repayment rates, increased collateral requirements and greater demand for loan renewals. There is growing concern among respondents about the future viability of some producers, especially dairy farmers who have suffered large losses due to record-low milk prices.

Second-quarter 2009 surveys of Federal Reserve Bank district lenders indicated land values were showing signs of stabilizing, but credit conditions deteriorated with cash flow.

Second-quarter 2009 surveys of Federal Reserve Bank district lenders indicated land values were showing signs of stabilizing, but credit conditions deteriorated with cash flow.

FYI

• For the full report on U.S. farmland values and land rental rates, visit http://usda.mannlib.cornell.edu/usda/current/AgriLandVa/AgriLandVa-08-04-2009.pdf.

• 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.

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