Drought Could Hinder Rising Farmland Values

Drought Could Hinder Rising Farmland Values

New Kansas City Federal Reserve report shows the U.S. midsection is maintaining farmland value, but drought is suffocating farm income.

At the start of the second quarter, farm income projections were looking bright, but a much different story actually played out, according to a report out Wednesday from the Kansas City Federal Reserve Bank.

Jason Henderson, Omaha Branch Executive and Maria Akers, Associate Economist say the drought is causing herd liquidation and may hinder farm income, though some bankers in the KC Fed's district—which includes some of drought's hardest-hit areas—could see support for crop income through insurance premiums and high crop prices.

Henderson and Akers, report authors, noted that some bankers in the district have pointed to previous years of strong farm income as the saving grace for some.

DROUGHT STRESS: Farmland values are holding steady, but drought concerns could have the potential to send them lower.

Weather was an obvious factor for farm income in the second quarter. "Early spring rains in the southern Great Plains led to better– than–expected winter wheat yields in Kansas and Oklahoma. The bigger wheat crop in 2012 contributed to stronger farm income during the quarter," the report notes, but "by the end of June, intensifying drought conditions cut bankers’ expectations for farm income this fall."

Bankers estimated that a host of factors relative to the drought would slash farm income, including poor pastures, rising feed costs, earlier irrigation and increased herd liquidation. Bankers also estimated that the drought would limit capital spending.

Though drought has continued to plague the thoughts of many farmers, the report indicates that farmland values were rising in the second quarter, albeit slowly (up 3 percent). Though the values were still above 2011 levels, they were growing at roughly 6 percent in the first quarter. Irrigated farmland values were steady, and non-irrigated values rose.

Rachland values also climbed, with annual value gains averaging 16 percent, according to the report.

"Bankers noted that strong demand for farmland raised interest in more marginal tracts of land with production potential. Although the number of farmland sales remained low during the growing season, some bankers expected the number of sales to rise after harvest," the report said.

Nebraska led the farmland value gains with a 35% increase in farmland values and a 27% increase in ranchland values from a year ago. Oklahoma posted the lowest increases in the KC Fed district for irrigated and non-irrigated farmland values, with 15 percent and 10.9 percent gains, respectively. Bankers in the area attribute the small gains to extreme drought that has affected the area for the second year in a row.

See the full report here.

TAGS: Wheat
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