Farmland value drops by 1%

Farmland values fall in Illinois, Iowa and Michigan, but increase in Indiana and Wisconsin.

Farmland values in the Seventh Federal Reserve District declined for the third year in a row.

The value of "good" farmland dropped by 1% from the third quarter to the fourth quarter, according to 192 survey respondents from district banks. The district includes Illinois, Iowa, Michigan, Wisconsin and Indiana.
Nearly 60% of survey respondents expect farmland values to be stable from January through March, while 40% expect farmland values to decrease.

Farmland values
The final quarter of 2016 was the tenth straight quarter without the district as a whole seeing a year-over-year increase in agricultural land values. In the fourth quarter of 2016, Illinois, Iowa, and Michigan saw year-over-year decreases in agricultural land values, while Indiana and Wisconsin saw modest increases. The district’s farmland values were down 1% in the fourth quarter of 2016 relative to the third quarter.

The district’s decrease in farmland values for 2016 was 2% after adjusting for inflation. In real terms, the decrease in the district’s agricultural land values from their peak in 2013 through the end of 2016 was 9.5%. Since its 2013 peak, Michigan farmland values have experienced a decline of 12%. Iowa farmland values have declined by 15%. In contrast, Wisconsin agricultural land values have risen 4% in real terms since 2013. Even after three annual declines, the index of inflation-adjusted farmland values for the district was nearly 60% higher in 2016 than its previous peak in 1979. 

Farm credit conditions
Farm credit conditions deteriorated further in the fourth quarter of 2016. Lower repayment rates on non-real-estate farm loans in the October through December period of 2016 versus the same period of 2015, combined with higher rates of loan renewals and extensions, suggested a worsening credit climate. Additionally, for 2017, 3% of farm loan customers were not expected to qualify for operating credit at the banks of the survey respondents. With non-real-estate loan demand up more than funds available for lending compared to their respective levels of a year ago, the average loan-to-deposit ratio for the Ddstrict (75%) was higher than a year ago. Finally, average interest rates on agricultural loans jumped up at the end of 2016 to their highest levels since the end of 2013.

Record harvests of corn and soybeans for were produced in district states in 2016. According to USDA data, 2016 output in the five states increased 11% for corn and 8.7% for soybeans from 2015 levels. The states’ corn yield jumped 9% in 2016 from 2015—to a record 192 bushels per acre. Additionally, the soybean yield climbed 7.8% in 2016 from 2015—to a record 58.3 bushels per acre. In 2016, Iowa and Wisconsin set records for corn yields, and all five states set records for soybean yields.

Crop prices and usage
Even though plentiful supplies of corn and soybeans exerted downward pressures on corn and soybean prices in 2016, reinvigorated demand for these crops (particularly for export) helped allay fears of even lower crop prices. In fact, according to USDA data on trade volumes, soybean exports in 2016 also set an all-time high. Soybean prices in December 2016 were, on average, 10% higher than a year ago, yet were 6% lower than two years ago. In December 2016, corn prices were, on average, 9% lower than a year ago and 12% lower than two years ago. Total usage of corn at 14.6 billion bushels in the 2016–17 crop year would result in U.S. ending stocks of 2.36 billion bushels. At 16%, the stocks-to-use ratio for corn would be the highest since the 2004–05 crop year. Total soybean usage of 4.11 billion bushels in the 2016–17 crop year would result in ending stocks of 420 million bushels for the U.S. At 10%, the stocks-to-use ratio for soybeans would be the highest since the 2006–07 crop year. 

Livestock prices
Livestock prices dropped in 2016 relative to the previous year, but not by as much as in 2015. The index of prices for livestock and associated products in December 2016 was down 3% from a year ago and 26% from two years ago. While the average price of cattle continued to move lower in 2016 (down 8% in December 2016 from a year earlier), December milk and hog prices were up 9% and 1% from a year ago.

Credit conditions
Agricultural credit conditions stumbled again in the fourth quarter of 2016. The index of non-real-estate farm loan repayment rates had not been higher since the fourth quarter of 2014, yet repayment rates, on the whole, were once again lower than the same period of the previous year. With 4% of survey respondents reporting higher rates of loan repayment and 39% reporting lower rates, the index of repayment rates was 65 in the final quarter of 2016. Non-real-estate farm loan renewals and extensions in the fourth quarter of 2016 were higher than in the fourth quarter of 2015, as 39% of respondents reported increases in them while only 3% reported decreases. Moreover, the volume of the farm loan portfolio deemed to have “major” or “severe” repayment problems grew to 5.9% in the fourth quarter of 2016, matching the share in 2002 and the highest such proportion in 15 years.

Credit standards tightened compared with a year ago, as 40% of the survey respondents reported their banks had tighter credit standards for agricultural loans in the fourth quarter of 2016 relative to the fourth quarter of 2015 and 60% reported no change. In addition, 24% of responding bankers noted that their banks required larger amounts of collateral for customers to qualify for non-real-estate farm loans during the October through December period of 2016 relative to the same period of a year ago, and only 1% required smaller amounts. Another notable development was an upward shift in agricultural interest rates. As of January 1, 2017, the average interest rates for farm operating loans (5.03%), feeder cattle loans (5.10%), and agricultural real estate loans (4.71%) were all at their highest levels since the end of 2013.

Source: Federal Reserve Bank of Chicago

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