March 28, 2024

Fed survey finds increase in farmland values

CHICAGO — Farmland values in the first quarter of 2021 were 7% higher than a year ago, the largest jump since the 11% increase in 2012.

The findings were from a survey conducted by the Federal Reserve Bank of Chicago and reported in The AgLetter. The district includes the northern two-thirds of Illinois and Indiana and all of Iowa, Wisconsin and Michigan.

“Farmland values gained 3% in the first quarter of 2021 from the fourth quarter of 2020. Indiana (8%), Iowa (10%), and Wisconsin (8%) had steeper year-over-year increases in farmland values than did the district as a whole, but Illinois had a more modest increase (4%),” said David Oppedahl, Chicago Fed senior business economist.

After being adjusted for inflation with the Personal Consumption Expenditures Price Index, district farmland values in the first quarter of 2021 were up on a year-over-year basis for the fourth quarter in a row.

Prior to this positive trend, there had been real year-over-year declines in farmland values from the third quarter of 2014 through the first quarter of 2020.

“A large increase in district farmland values wasn’t surprising given that the survey results showed strong demand for agricultural ground, along with limited availability. For the three- to six-month period ending with March 2021 relative to the same period ending with March 2020, 76% of the survey respondents reported higher demand to purchase farmland and just 1% reported lower demand,” Oppedahl noted.

“Moreover, there was a lower amount of agricultural land for sale during the most recent winter and early spring relative to a year ago, as 15% of the responding bankers reported more farmland was up for sale in their areas and 35% reported less. The number of farms and the amount of acreage sold were also down some in the winter and early spring compared with a year earlier.”

Survey participants indicated that a larger share of acres was purchased by farmers, implying that the share of acres purchased by investors contracted in the three- to six-month period ending with March 2021 relative to the corresponding period ending with March 2020.

Cash Rents

“Cash rental rates for Chicago Fed district agricultural acres climbed 4% from 2020 to 2021. For 2021, average annual cash rents for farmland were up 2% in Illinois, 4% in Indiana, 5% in Iowa, and 5% in Wisconsin,” Oppedahl said, noting not enough survey responses were received from bankers in Michigan to report a numerical change for that state.

“After being adjusted for inflation with the PCEPI, district cash rental rates rose 2% from 2020. This was the first increase after seven straight years of declining cash rents (in both nominal and real terms), which constituted the longest such streak in the history of the survey. In real terms, both the index of farmland cash rental rates and the index of agricultural land values peaked in 2013.”

Even after rising in 2021, the index of real cash rents was 38% below its level in 2013; the index of real farmland values was just 6% off from its 2013 peak.

Given that the change in the index of inflation-adjusted farmland values has been better than the change in the index of inflation-adjusted agricultural cash rental rates each year since 2009, owning farmland has been more compelling than leasing farmland over this period.

“Higher farmland values and cash rents were the result of a dramatic turnaround in agricultural prospects from a year ago — generated in part by higher earnings for farms as key agricultural prices recovered (and even rose above year-earlier levels) after the initial impacts of the pandemic lessened,” Oppedahl said.

In March 2021, corn and soybean prices were 33% and 56% higher than a year ago, respectively, according to data from the U.S. Department of Agriculture. Hog prices were 38% above those in March 2020.

“In addition, the USDA’s Coronavirus Food Assistance Program pumped $24.1 billion into the farm economy over the past year, with 23.5% ($5.68 billion as of May 2, 2021) coming to the five states of the district. Combined, these factors (along with lower real interest rates) boosted farm incomes, helping drive up both farmland values and cash rents,” Oppedahl said.

Credit Conditions

Agricultural credit conditions for the Chicago Fed district also improved in the first quarter of 2021. As of April 1, the average nominal interest rates on operating loans (4.42%), feeder cattle loans (4.58%), and agricultural real estate loans (4.08%) were all lower than in any previous survey findings.

Furthermore, after being adjusted for inflation using the PCEPI, average agricultural interest rates fell to historical lows last seen at the end of the third quarter of 2011, with the average real interest rate for farm real estate loans even edging slightly below its previous low.

“The index of repayment rates for non-real-estate farm loans ascended to 146 — the highest reading since the first quarter of 2012; 48% of responding bankers observed higher rates of repayment for the first quarter of 2021 relative to the first quarter of 2020, and only 2% observed lower rates,” Oppedahl reported.

Demonstrating similar positive developments, just 4% of the survey respondents reported higher levels of loan renewals and extensions over the January through March period of 2021 compared with the same period last year, while 34% reported lower levels of them.

Also, bankers reported that only 4%, on average, of their farm borrowers had more carryover debt — loans not paid off at the end of the growing season and subsequently carried over into the next one — in 2021 than in 2020.

The share of loans guaranteed by the USDA’s Farm Service Agency in the portfolios of the reporting banks was around 6% for the district as a whole — about the same level as a year ago.

One Indiana banker reported: “Government payments, grain price increases, and above-average yields have grain farmers in their most liquid position in the last ten years. Farmers are in a very strong position, which is negatively impacting loan volumes.”

Looking Ahead

Seventy-four percent of survey respondents anticipated farmland values to rise in the second quarter of 2021 and 26% anticipated them to be stable and none anticipated them to fall.

Survey respondents forecasted that the volume of farm real estate loans would increase in the district during the April through June period of 2021 relative to the same period of 2020, but they forecasted that the overall volume of non-real-estate farm loans would decrease.

The blend of non-real-estate agricultural loan types was projected to vary from a year ago: Volumes for farm machinery and grain storage construction loans were anticipated to increase, whereas volumes for operating and FSA-guaranteed loans, along with those for dairy and feeder cattle loans, were anticipated to decrease.

According to an Illinois respondent: “The farm economy ended very strong in 2020, and 2021 looks to be even better.”

Tom Doran

Tom C. Doran

Field Editor