Changing trends showing up in ag land values, interest rates
By Dave Natzke
Several Federal Reserve Banks provided land value and credit condition summaries from second-quarter ag lender surveys. It's tough to find a national trend, with local economic and weather conditions having a big impact. There may also be a change in interest rates blowing in the wind. As always, state and district averages may not reflect local conditions.
Q2 2013 average farmland values in the Federal Reserve Bank of Chicago (covering all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin) were up 17% from a year ago. However, the stellar year-over-year gains in farmland values across the five district states masked the comparative weakness of the quarterly results, according to David Oppedahl, business economist. District values were unchanged from Q1 2013, the first time there was no quarter-to-quarter change since 2009.
Dairy-dependent Wisconsin had the smallest year-to-year gain, at just 7%, but Michigan had the largest quarterly decline, down 7%. Illinois ag land values also declined during the quarter. So, while the farmland values on a year-over-year basis still appeared to be soaring, changes on a quarterly basis may be shifting in the latter half of 2013. Most ag lenders predict land values will remain flat for Q3.
Quarterly average interest rates in the Chicago district rose, the first increase since early 2011. As of July 1, 2013, the district averages for interest rates on new farm operating loans and real estate loans were 4.94% and 4.65%, respectively. While these rates were still lower than those of a year ago, the uptick may mark an important shift in the district’s agricultural credit conditions, Oppedahl said.
Agricultural loans with “major” or “severe” repayment problems remained at less than 2% of the district loan portfolio. Collateral requirements for loans tightened a bit in the second quarter of 2013 relative to the second quarter of the previous year.
Looking forward, crop producers will face tighter cash flows if crop prices slide further. Falling crop prices should bring relief to livestock producers, whose profits have suffered due to the high feed costs in recent years.
Compared to a year earlier, 2013 Q2 farmland values also surged 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). With drought persisting across much of the district, farmland with access to irrigation posted the strongest gains. In Q2, the value of irrigated cropland jumped 25% from a year ago, the ninth consecutive quarter in which irrigated cropland values have risen more than 20% year-over-year. Nonirrigated cropland value gains moderated slightly in Q2, but were still 18% higher than a year ago. Annual gains in ranchland values held steady near 14%.
While most bankers expected farmland values to remain at current levels, an increasing number believe values may have peaked. More bankers also expected farmland values to drop after harvest, likely due, at least partially, to expectations of lower farm income. Among bankers anticipating a decline, though, a majority estimated farmland values would fall less than 10% during the next year.
Corn and soybean prices were expected to drop this fall if improved growing conditions in the eastern Corn Belt boost U.S. production. Not only would lower crop prices reduce farm income, but persistent drought in parts of the district could limit local yield potential, particularly in areas without irrigation. With lower expected prices and the possibility of a poor harvest, survey respondents expected farm income to be less than last year in every district state.
The expectation of weaker farm income, however, does not appear to be a main factor underpinning farmland values, according to economists Nathan Kauffman and Maria Akers. In ranking factors that contribute to farmland values, more district bankers pointed to the overall wealth level – accumulated over a couple years of strong crop prices – as well as the current low interest rate environment and a lack of alternative investment options as significant factors.
According to survey respondents, operating loan demand rose to its highest level in more than two years. Loan repayment rates improved modestly, but bankers expected repayment rates to fall in the future with weakening farm income. In addition, interest rates for farm real estate loans edged up during the quarter, which could make repayments more difficult. Interest rates on farm operating loans decreased slightly in the second quarter, but by the smallest percentage in three years.
The lingering drought and poor crop-producing weather conditions continue to keep a lid on ag land value increases in the Federal Reserve Bank of Dallas (covering all or portions of Texas, New Mexico and Louisiana). Q2 2013 cropland (irrigated and dryland) values rose slightly from Q1. Ranchland saw the largest increases, with values were up almost 3 % from Q1, but were still down from year-ago levels. The vast majority of bankers anticipate land values will be stable over Q3.
Farm incomes decreased this quarter for the first time since the end of 2011. Bankers responding to the Q2 survey continued to report widespread drought conditions, which, coupled with a late freeze, caused a poor winter wheat harvest in many areas. The drought is also adversely affecting ranchers by damaging cattle-grazing pastures; however, a number of respondents noted that cattle prices remained steady. Scattered rain helped some crops, but most respondents expect another poor year, with some expecting farm incomes to come mainly from crop insurance.
Credit standards continued to tighten in the second quarter, although the vast majority of respondents noted no change in standards. Demand for agricultural loans continued to decline. Loan repayment rates increased again this quarter, but not as steeply as last quarter. Renewals and extensions of loans fell, and volumes for all types of loans continued to decrease. Q2 real estate and operating loan interest rates were down from the previous quarter.
Compared to a year earlier, average 2013 Q2 values for quality farmland increased in much of the Federal Reserve Bank of St. Louis (covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee). Quality farmland values across the district averaged $5,672/acre in 2Q 2013, a noticeable increase (11%) from the Q1 average of $5,111/acre. Over the past four quarters, quality farmland values in the district increased by 20.6%. And, in contrast to other parts of the Heartland, ag lenders expect the increase to continue in Q3, along with increasing cash rents.
While variations existed within zones, interest rates on all types of loans increased modestly.
Richmond and Minneapolis
Reports from Richmond and Minneapolis districts were not yet available.
District reports available
To see individual Federal Reserve district reports, go to these websites: