Quarterly ag credit conditions improve, but dairy remains troublesome

By Dave Natzke

Spurred on by higher commodity prices, third-quarter 2010 surveys of Federal Reserve Bank district lenders indicate rising farm income and robust demand for farmland. However, dairy regions continue to face stress.


Third-quarter 2010 average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan, Minnesota and Wisconsin) jumped 10% compared to a year ago, according to David Oppedahl, business economist, writing in the bank’s quarterly AgLetter. The value of “good” agricultural land rose 3% relative to the second quarter of 2010, and almost half of lenders surveyed expected values to continue climbing in the fourth quarter.

Farmland values in Iowa were up the most, with a year-over-year increase of 13%, followed by Indiana and Michigan, at 11% and 10%, respectively, and Illinois, at 8%. The dairy economy continues to drag land values in Wisconsin, however, where the quarterly increase was just 1%, and the annual increase was 3%, well below neighboring states.

About 60% of responding bankers expected higher land demand among farmers to purchase farmland this fall and winter, with 37% also expecting demand among nonfarm investors to grow.

Stronger agricultural credit conditions in the third quarter of 2010 reflected higher expected farm income relative to last year. Loan repayment rates improved in July through September of this year compared with the same period of 2009. Loan renewals and extensions were down. Demand for non-real-estate loans in the third quarter of 2010 receded from the level of a year earlier. Interest rates on agricultural operating and real estate loans dropped to the lowest values recorded in history of the survey. As of Oct. 1, the district average for interest rates on agricultural real estate loans was 5.81%. Iowa had the lowest rate for farm mortgages, 5.64%; and Michigan had the highest rate, 6.16%. Interest rates for operating loans declined to a new low of 6.04%, on average, for the District. Operating loan rates ranged from 5.68% in Indiana to 6.50% in Wisconsin.

Forced sales or liquidations of farm assets among financially stressed farmers were expected to diminish this fall and winter, according to respondents. Wisconsin was the only state where the trend in forced sales and liquidations did not reverse from a year ago, and one-third of the respondents foresaw additional legal resolutions there.

For more information, visit: www.chicagofed.org/digital_assets/publications/agletter/2010_2014/november_2010.pdf.

Kansas City

District cropland values strengthened in the third quarter of 2010 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 Brian Briggeman, economist, and Maria Akers, assistant economist.

Quarterly survey respondents also reported a rise in cash rental rates for both cropland and ranchland. Robust demand by farmers was still the primary driver in district farm real estate markets, though investor interest in good quality farmland remained high.

District bankers noted nonfarm investors typically expected a 5% or better rate of return on farmland purchases. While the supply of farmland on the market has declined over the past couple of years, some survey contacts felt that current elevated prices and the prospect of higher capital gains taxes in 2011 could prompt some farm owners to consider selling before year-end.

With a return to profitability for the beef sector, ranchland values rose as well, recovering from declines earlier this year. However, higher feed costs could limit profit opportunities for livestock operators.

With incomes climbing in the third quarter, farm credit conditions improved. More district bankers noted higher loan repayment rates and fewer loan renewals and extensions. Average farm loan interest rates fell to their lowest levels since the survey began in 1976, reaching a new survey low of 6.7% for operating loans and 6.4% for farm real estate loans. Collateral requirements eased.

Farm loan demand was steady and district bankers indicated an ample supply of funds available for qualified borrowers. Bankers reported a significant rebound in capital spending, especially for crop equipment and grain storage bins.

For more information, visit: www.kansascityfed.org/agcrsurv/agcrmain.


In the Federal Reserve Bank of Dallas (covering all or portions of Texas, New Mexico and Louisiana), land values were stable or slightly up, although land sales remain subdued.

The third-quarter survey of ag lenders suggested continued confidence for agricultural conditions in the district. Thirteen percent of respondents expect land values to increase over the next three months, the highest share in two years.

Loan repayment rates and requests for renewals or extensions stabilized in the third quarter. Demand for loans continued to wane; but demand for operating and crop storage loans was stronger.

Multiple regions benefitted from rains, resulting in good planting conditions and pasture growth, yielding good hay crop and above-average grazing conditions. Cotton yields are expected to be high and prices are elevated, providing solid margins for farmers. Cattle prices strengthened further, boosting profits for livestock producers.

For more information, visit: www.dallasfed.org/research/agsurvey/2010/ag1003.html.


Ag credit conditions were not yet posted in the Minneapolis Federal Reserve district (covering all or portions of Montana, North and South Dakota, Minnesota and northwestern Wisconsin). For more information, visit: www.minneapolisfed.org/publications_papers/agcredit/index.cfm.


Ag credit conditions were not yet posted in the Richmond Federal Reserve district (covering all or portions of Maryland, West Virginia, Virginia, North Carolina and South Carolina). For more information, visit: www.richmondfed.org/research/regional_economy/surveys_of_business_conditions/agricultural_credit/index.cfm