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Ag land values: ‘Moderation’ slipping into the conversation

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By Dave Natzke

 

Farmland values generally continued to increase in the first quarter of 2013, according to quarterly newsletters from several district Federal Reserve district banks. However, after approaching increases comparable to the boom years of the 1970s, moderation is coming into the picture.

 

Chicago

Average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin) continued to increase in the first quarter of 2013 (Q1), but moderation is emerging, according to David Oppedahl, business economist. 

Compared to the 2012 Q4, average 2012 Q1 farmland values across the district were up 4%; compared to 2012 Q1, the increase was 15%, based on a survey of 219 agricultural bankers. The district farmland value increases masked weakening values of some areas. Most notable was a 3% drop in Wisconsin’s farmland values compared to the same quarter a year ago.

More than three-quarters of the responding bankers expected farmland values to stabilize in 2013 Q2.

2013 Q1 district farmland cash rental rates were up 11% compared with 2012. It was the smallest annual gain in the past three years. Among individual states, farmland cash rental rates were up 9% in Illinois; 11% in Indiana; 13% in Iowa; 2% in Michigan; and 12% in Wisconsin.

Ag land demand increased in the three- to six-month period ending with March 2013. Similarly, farms and acreage sold, and the amount of farmland for sale, also rose.

Credit conditions continued to improve, with fewer loan renewals and extensions. However, demand for non-real-estate loans fell to its lowest level since 1986, and the share of banks below their desired level of lending rose to 89%. Six percent of the survey respondents reported that their banks required larger amounts of collateral for loans during 2013 Q1 relative to the same period last year.

Interest rates on farm loans moved to record lows. As of April 1, 2013, average interest rates had fallen to 4.91% for operating loans and 4.60% for agricultural real estate loans.

 

Average variable loan interest rates (%), Federal Reserve Bank districts

  Operating Operating Intermediate Intermediate Real estate Real estate
District Jan. 1. 2013 April 1, 2013 Jan. 1, 2013 April 1, 2013 Jan. 1, 2013 April 1, 2013
Chicago 5.03 4.91     4.70 4.60
Dallas 5.93 5.98 5.94 5.84 5.62 5.57
KansasCity 5.90 5.80 5.71 5.57 5.47 5.36
St. Louis 4.99 4.95 5.18 5.06 4.92 4.66

 

Kansas City

2013 Q1 farmland values posted double-digit annual gains for the third straight year in the Federal Reserve Bank of Kansas City, according to Nathan Kauffman, economist and Maria Akers, assistant economist. The district covers Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.

Compared with 2012 Q1, the value of non-irrigated cropland rose 19.3%, with the strongest increase in Missouri, where drought conditions have improved. With drought conditions lingering in other district states, irrigated farmland values rose 21.5% above year-ago levels. Ranchland values increased 14.3% compared with last year, but rose only minimally in Colorado where drought remained intense. 

Compared to the previous quarter, the pace of appreciation moderated somewhat in 2013 Q1: The value of non-irrigated and irrigated cropland rose 3.4% and 2.9%, respectively. 

Surging farmland values have reshaped farm balance sheets in the district. Rising farmland values have significantly reduced debt-to-asset ratios for many farmland owners. For producers looking to buy farmland with limited cash or equity, though, higher prices have translated into higher debt levels. While overall debt levels remained manageable, some bankers noted that record land prices were raising the debt obligations for young, beginning and expanding producers. Bankers also indicated that livestock producers were more highly leveraged due to recent losses accentuated by drought. 

Capital spending was stronger than expected in 2013 Q1, as producers appeared to be taking advantage of record-low interest rates to finance capital purchases. However, they were using cash to cover operating costs, limiting overall operating loan demand. Bankers reported fewer requests for farm loan renewals and extensions, and loan repayment rates remained higher than the previous year. After a robust 2013 Q1, farm household and capital spending were expected to slow in the coming months amid softening incomes and higher operating costs. 

 

Dallas

Bankers responding to the 2013 Q1 survey noted drought conditions continued to stress producers – especially the livestock sector due to poor pasture conditions and high feed costs –  in the Federal Reserve Bank of Dallas, covering all or portions of Texas, New Mexico and Louisiana.

Ag land values in 2013 Q1 were largely unchanged from 2012 Q4. Ranchland and dryland values were slightly below year-ago levels, while irrigated cropland values – on an upward trend – were up 10% from year-ago levels. The great majority of survey respondents expect farmland values to hold steady over the next three months. 

Demand for loans declined more steeply during 2013 Q1, while loan repayment rates continued to rise. Dairy-related loans were down from both 2012 Q 1 and 2012 Q4.

Loan renewals and extensions declined again, but the great majority of respondents noted no change. Volumes of loans declined across all types, with feeder cattle loans seeing the steepest drop. 

Ninety percent of bankers reported no change in credit standards, while most of the remainder tightened their standards. 

Shifts in quarterly average interest rates were mixed compared to the previous quarter. As of April 1, 2013, small increases were noted for feeder cattle and operating loans, with small declines for intermediate and farm real estate loans.

 

St. Louis

Average 2013 Q1 prices for quality farmland (-2.3%), ranchland or pastureland (-5.1%) were down slightly relative to 2012 Q4 in the Federal Reserve Bank of St. Louis, covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. 

Similarly, cash rents of quality farmland declined an average of 8.6%, with ranchland or pastureland rental rates falling an average of 4.5%.

Despite banker expectations that land values and rental will rise over the next quarter, anticipated increases have moderated somewhat.

2013 Q1 actual farm income, household spending and outlays for capital expenditures all surpassed

expectations of district bankers, as did loan repayment rates, according to Gary Corner, Brett Fawley, and Kevin L. Kliesen, writing in the district’s Agricultural Finance Monitor. Given its wide geography, their was a wide variation in loan demand across the district, but overall loan demand was generally softer in 2013 Q1.

 

Minneapolis/New Richmond

Reports covering the first quarter of 2013 in Minneapolis and Richmond Federal Reserve 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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