Ag land values: It's the water
By Dave Natzke
Water availability is becoming a determining factor in farmland values across the nation’s heartland, according to quarterly newsletters from several district Federal Reserve district banks. In some districts, annual increases in land values approached the boom years of the 1970s.
Persistent drought sparked a rush in irrigated farmland sales during the fourth quarter of 2012 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. Districtwide, stronger sales vaulted irrigated cropland values 30% above year-ago levels, with a 13% jump in the fourth quarter alone.
Cash rental rates for irrigated cropland also surged more than 20% from a year ago, as landowners factored in high farm incomes on land with consistent access to water. Farmers were the predominant buyers of farm real estate and placed a premium on irrigated land due to water scarcity stemming from drought. However, non-irrigated cropland and ranchland also posted strong annual gains between 20% and 25%.
After falling for four straight years, bankers reported more non-farm purchases for recreation and residential/development purposes. However, bankers noted that young and beginning farmers were having difficulties acquiring land at today’s high prices due to their holding less equity.
Capital spending rebounded in the fourth quarter, although overall loan demand remained low. Loan repayment rates increased.
Interest rates for both operating and real estate loans continued to edge down. As of Jan. 1, 2013, the average interest rates for variable rate loans were 5.9% for farm operating loans, 5.71% for machinery/intermediate loans, and 5.47% for agricultural real estate loans.
Year-over-year average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin) were up 16% in 2012, picking up the pace at the end of the year, according to David Oppedahl, business economist. After adjusting for inflation, the annual increase was the third largest in 35 years. More specifically, farmland values experienced a cumulative rise of 52% over the period 2010–12, matching the fastest gain of the 1970s boom.
The fourth quarter rise in the value of “good” farmland in the district was 7%, based on a survey of 212 agricultural bankers. The increase in land values came despite one of the worst Midwest droughts since 1988. According to USDA data, district corn and soybean harvests were the lowest since 2002 and 2007, respectively.Respondents anticipated farmland values to rise further during the first quarter of 2013.
Ag credit conditions showed improvement in the fourth quarter of 2012, with loan demand moving higher. Loan repayment rates were up, but bankers in Wisconsin and its dairy-based economy encountered lower rates of loan repayment.
About 40% of the bankers surveyed expected ag producers to spend more on capital items in 2013, including land, machinery, trucks and autos, buildings and facilities. Recovery from the drought will be a key factor in 2013 for both crop and livestock producers.
About 20% of ag bankers reported tighter credit standards in the fourth quarter, with 10% requiring additional collateral. Farm loan interest rates dropped to new lows in the fourth quarter of 2012. As of Jan. 1, 2013, the average interest rates for variable rate loans were 5.03% for farm operating loans and 4.70% for agricultural real estate loans.
Bankers responding to the fourth-quarter survey noted drought conditions continued to stress producers in the Federal Reserve Bank of Dallas, covering all or portions of Texas, New Mexico and Louisiana. While 2012 harvests improved from the previous year, a poor winter wheat crop was anticipated without more rain.
Agricultural land value changes in the district were mixed. Irrigated land values increased again, gaining roughly 5% during the quarter, while dryland values remained largely unchanged and ranchland values fell slightly. Year-over-year, all cropland values rose, and a majority of surveyed bankers expect values to hold steady during the first quarter of 2013.
Demand for ag loans continued to decline in the fourth quarter, as did loan renewals and extensions. Once again, feeder cattle loans, followed by dairy loans, showed the largest drops in volume compared with a year ago. Loan repayment rates continued to rise, although at a slower pace than in the past two quarters. Many bankers expressed concerns over the potential of federal farm policies that could eliminate direct payments to producers.
Quarterly average interest rates were all lower. As of Jan. 1, 2013, the average interest rates for variable rate loans were 5.93% for farm operating loans, 5.94% for machinery/intermediate loans, and 5.62% for agricultural real estate loans.
Bankers continue to report an upward trend in land values and cash rents in the Federal Reserve Bank of St. Louis, covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. Compared with the previous quarter’s survey, bankers reported that land values (quality farmland, ranchland, or pastureland) increased by an average of 4%.
Bankers expect land values and cash rents to continue to rise, with gains in quality farmland generally expected to outpace gains in ranchland or pastureland (nonirrigated) in almost all zones, according to Gary Corner, Brett Fawley, and Kevin L. Kliesen, writing in the district’s Agricultural Finance Monitor.
On average, bankers indicated about 73% of the farmland purchased was purchased by farmers. Of the land not purchased by farmers, nearly all bankers indicated “investment” as a common reason for purchases.
Fourth-quarter farm income and spending were higher than a year ago across the district, although it varied by zone within the district. Farm income in the St. Louis and Louisville zones was on pace with a year earlier, while Little Rock and Memphis zones reported a notable increase thanks to higher corn and soybean yields.
Bankers indicated an increase in loan demand and repayment rates in all zones in the fourth quarter. There was a strong sentiment toward greater loan demand and funds availability in the first quarter of 2013 relative to 2012.
Interest rates, both fixed and variable, continued to show modest declines. As of Jan. 1, 2013, the average interest rates for variable rate loans were 4.99% for farm operating loans, 5.18% for machinery/intermediate loans, and 4.92% for agricultural real estate loans.
Finally, bankers indicated strong competition between commercial banks and the Farm Credit System to finance the land purchases. A common view seems to be that commercial banks are finding it difficult to compete with the Farm Credit System’s tax exemption and low cost of funds. Many respondents are concerned about the longer-term implications of this development for their farmland lending business.
Reports covering the fourth quarter of 2012 in Minneapolis and Richmond Federal Reserve districts were not yet available.
Variable loan interest rates
Federal Reserve Bank districts
|Operating||Operating||Intermediate||Intermediate||Real estate||Real estate|
|District||Oct. 1, 2012||Jan. 1, 2013||Oct. 1, 2012||Jan. 1, 2013||Oct. 1, 2012||Jan. 1, 2013|
Source: Quarterly district Federal Reserve Bank surveys