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Wait-And-See Mode

Farmland values continue stable trend: Federal Reserve

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CHICAGO — There was minimal year-over-year or quarter-to-quarter movement in farmland values in the upper two-thirds of Illinois and Indiana, according to a Seventh Federal Reserve District survey.

Overall “good” farmland values were unchanged from April 1 to July 1 and from July 1, 2018, to July 1, 2019, the quarterly report noted.

The southeast portion of the Seventh District’s area in Illinois did see a 2% increase in value from the first to the second quarter of this year and a 1% increase compared to a year ago. Illinois’ northwest portion of the district was unchanged year-over-year on average, but had a 2% decline from the first quarter.

On average, Iowa’s farmland values declined 2% compared to July 1, 2018, and increased 1% from April 1 to July 1.

Farmland values for the district overall, that also includes all of Iowa and Michigan and most of Wisconsin, were down 1% in the second quarter of 2019 from a year earlier.

However, values for “good” agricultural land in the district were unchanged from the first quarter to the second quarter of 2019, according to a survey of 157 bankers.

“After being adjusted for inflation with the Personal Consumption Expenditures Price Index, district farmland values were down 2% in the second quarter of 2019 from the second quarter of 2018; the streak of year-over-year declines in real farmland values was extended to five full years,” said David Oppedahl, Federal Reserve Bank of Chicago senor business economist.

Ag Conditions

The district second quarter summary also addressed farm conditions and expectations.

Reporting bankers indicated that 69% of their borrowers were at least modestly affected by extreme weather events in the first half of 2019.

Despite concerns about the effects on farming from adverse weather and trade disruptions, 83% of survey respondents expected district agricultural land values to be unchanged during the third quarter of 2019 — only 2% expected them to increase, while 15% expected them to decrease.

“In the second quarter of 2019, agricultural credit conditions for the district were weaker compared with a year ago once again,” Oppedahl said.

Repayment rates for non-real-estate farm loans were lower in the second quarter of 2019 than a year earlier. The portion of the district’s agricultural loan portfolio reported as having “major” or “severe” repayment problems, at 6.2%, had not been higher in the second quarter of a year since 1999.

In addition, renewals and extensions of non-real-estate farm loans in the district were up from a year ago. For the April through June period of 2019, the demand for non-real-estate farm loans was higher than a year earlier, but the availability of funds for lending by agricultural banks was lower.

For the second quarter of 2019, the district’s average loan-to-deposit ratio was 80.2%. Average nominal interest rates for agricultural real estate and operating loans moved down during the second quarter of 2019, while the average rate for feeder cattle loans edged up.

“Muted expectations for farm income continued to be a factor in sliding real farmland values. A significant portion of Midwest farm income depends on the production of two primary crops: corn and soybeans,” Oppedahl said.

Planting Delays

Because of unusual wetness, many farmers had to delay planting corn and soybeans this year, and a much higher share of fields than normal were not even planted in 2019.

According to responding bankers, 45% of their agricultural borrowers were modestly affected by bad weather conditions in the first half of the year and another 24% were significantly affected.

Borrowers in Illinois, Indiana and Michigan faced the worst of the weather-related repercussions. So, corn and soybean yields are expected to drop this year to well below their long-term trends.

The expected loss of corn and soybean output was made even worse by spotty early summer precipitation. Based on U.S. Department of Agriculture data, district corn and soybean crop conditions in June and July were inferior compared with those of a year ago.

“With lower yields expected across the Midwest, corn and soybean prices should adjust upward. Indeed, corn and soybean prices climbed 9.6% and 3.6%, respectively, in June from May. However, tariffs on agricultural exports are limiting how much these crop prices can increase,” Oppedahl said.

“It seems unlikely that these prices will rise enough to compensate for lost output, so the profitability of many corn and soybean farms will almost surely fall from their 2018 levels — possibly by a lot for some.”

Moreover, feed costs have risen enough to squeeze the profitability of livestock producers. Many of them were already facing prices for their products that were lower than a year ago, with milk prices being an exception.

The USDA’s June index of prices received for livestock products was down 2% from a year earlier. In response to falling exports due to the tariffs, the USDA announced another iteration of the Market Facilitation Program, which could provide up to $16 billion in payments to farmers with eligible acres or livestock.

Short-Term Stability

Even with crop output expected to fall, most survey respondents anticipated district farmland values would be stable in the short term, as 83% of responding bankers projected no change in farmland values for the third quarter of 2019 — 15% projected them to decrease, while only 2% projected them to increase.

Survey respondents projected volumes of non-real-estate farm loans — notably, operating loans and loans guaranteed by the Farm Service Agency of the USDA — to increase in the third quarter of 2019 from year-earlier levels. However, they projected the volume of farm real estate loans to decrease.

An Iowa respondent noted that “farmers are more optimistic with the recent surge in prices and the government payments.” Crop conditions in Iowa were looking much better than those in Illinois, Indiana and Michigan, which may help explain the positive commentary.

In contrast, an Illinois banker reported that the uncertainty surrounding how much smaller this year’s harvest will be compared with last year’s — along with the associated price responses — “has everybody in wait-and-see mode.”

Tom C. Doran can be reached at 815-780-7894 or tdoran@agrinews-pubs.com. Follow him on Twitter at: @AgNews_Doran.

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