Q1 Ag land values continue to climbPrint
By Dave Natzke
Ag lender surveys showed high commodity prices pushed farmland values higher in the first quarter of 2012 across the nation’s heartland, although drought continued to negatively impact conditions in the South. With the outlook for lower corn prices – combined with higher costs – agriculture faces a more challenging road to profits in 2012 than in 2011.
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 5% in the first quarter of 2012, and are 19% higher than the first quarter of 2011, according to David Oppedahl, business economist, writing in the bank’s quarterly AgLetter.
Farmland values in Iowa continued to lead the pack, with a year-over-year increase of 27%. Ag land values in Illinois, Indiana, Michigan and Wisconsin were up 20%, 15%, 7% and 13%, respectively. Almost two-thirds of the reporting bankers anticipated agricultural land values to be stable during the second quarter of 2012, while a third expected further increases.
The number of farms sold, acreage sold and the amount of farmland for sale over the winter and early spring rose sharply. Farmers again purchased a higher share of the acres sold in the past three to six months, although investors were actively searching for properties.
District farmland cash rental rates climbed 17% in 2012 compared with 2011. The five top increases in cash rental rates have all come in the past six years, after adjusting for inflation. Changes in cash rental rates tend to lag changes in farmland values, both on the way down (as in the 1980s) and on the way up (as in the most recent decade)
Agricultural credit conditions became more favorable, with renewals and extensions of non-real-estate farm loans dropped. Farmers reportedly placed larger deposits than usual in banks, and farmers seemed to fund more of their operations with cash earnings rather than with bank credit. Only in Wisconsin was there evidence of greater loan demand.
Agricultural interest rates continued to decrease, establishing record lows as of April 1, 2012 (see Table 2).
Looking ahead, corn prices in the first quarter of 2012 averaged $6.23/bushel, according to USDA. The USDA forecasted an easing of tight corn stocks because of an anticipated record fall harvest, leading to a lower estimated price interval of $4.20-$5.00/bushel for corn in the 2012–13 crop year. Moreover, the prices for milk and hogs – the district’s biggest income generators from livestock – were down in 2012 relative to their values in the final quarter of 2011. Based on the USDA index of prices paid by farmers, input costs for agriculture rose 6.6% through the first quarter of 2012 compared with the first quarter of 2011. Thus, with possibly lower revenues for several outputs and higher costs for inputs, agriculture faces a more challenging road to profits in 2012 than in 2011.
Improved farm income and easing of drought conditions helped push land values higher 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. District farmland value gains accelerated in the first quarter even as record-high farmland values enticed more landowners to sell. For the first time since the survey began in the late 1970s, the annual value of district cropland rose more than 20% for two consecutive years.
In the first quarter of 2012, bankers reported higher cash down payments and greater use of pledged equity from existing real estate holdings had lowered the share of new debt financing on new real estate purchases to 47%.
Farm credit conditions strengthened further in the first quarter, while demand for farm loans dwindled. Producers continued to pay down debt and used more cash for operating expenses, capital spending and farmland purchases. Sluggish loan demand, however, did not indicate a slowdown in farm sector spending, with household and capital spending up in the first quarter. Collateral requirements for farm loans eased slightly. Several bankers commented that proceeds from crop insurance and mineral leases were driving loan repayments in drought areas.
The story was different in the Federal Reserve Bank of Dallas, covering all or portions of Texas, New Mexico and Louisiana. Bankers responding to the first-quarter survey noted early rains improved drought conditions, but said more moisture was needed. Input costs for farmers and ranchers increased, negatively impacting producers’ margins.
Agricultural land values generally rose across the board, although at levels far smaller than further north.
The effects of the drought continued to impact lending conditions, with loan demand continuing to decline. Requests for loan renewals or extensions fell, and loan repayment rates increased from a year ago. Loan volumes generally declined across types, with only operating loan volumes holding steady. Feeder cattle loans saw the steepest decline in volumes, as many herds were reduced in recent months in response to drought, increased feed costs and strong cattle prices.
The quarterly report from the Minneapolis Federal Reserve district (covering all or portions of Montana, North and South Dakota, Minnesota and northwestern Wisconsin) was not available.
• 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.