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Wednesday, May 23, 2012

2012 Farm Revenue May Ease Up On The Land Value Accelerator


Farmland prices are still rising, but the rate of advance has slowed, making one wonder if the top of the market will soon be seen.  Within the Chicago Federal Reserve District, which comprises Iowa, and parts of Illinois, Wisconsin, Indiana and Michigan, land prices climbed 5% in the first three months of the year, compared to the same period in 2011.  That compares to 19% for the prior 12 months as reported by commercial bankers in the region.  Farmland prices are still hot.

The Chicago Fed survey of 231 bankers in the district reported the first quarter of the year saw 8% increases in land values in the southeastern two-thirds of Wisconsin and the northern two-thirds of Illinois.  Prices rose by 4% in Iowa, 5% in Michigan, and 3% in Indiana.  For Iowa, that compares to the 27% rise in land prices for the period from April 1, 2011 to April 1, 2012.  But the 5% quarterly gain was in line with the prior 18 months.

Ag economist David Oppedahl of the Chicago Fed District asked the commercial lenders about the general nature of recent farmland auctions and discovered:
1) There were some auctions where the reserve price was not met.
2) Farmers were primary purchasers of land in the past 3 to 6 months.
3) Investors are still searching for bargains in land purchases.
4) 74% of the bankers reported a higher demand for farmland than year earlier levels.
5) Only 1% of bankers reported a lower demand for farmland.
6) 46% of the bankers reported an increase in the amount of farmland for sale.
7) Only 13% reported less farmland being available to the market.

Along with the 19% increase in land values compared to year earlier levels, was a 17% increase in cash rent compared to 2011.  Cash rent increases were reported 20% higher in Iowa, 15% higher in Illinois and Indiana, 19% in Wisconsin, and 12% higher in Michigan.  The year over year increase was the second highest recorded, only behind the increase seen in 1981.

The demand for more land, either through purchases or rent, appears to be driven still by higher commodity prices and greater net farm income, say the Chicago Fed and its survey respondents.  However, Oppedahl reports lower commodity prices have reduced the upward pressure in 2012, as a result of lower prices for corn, hogs, and dairy products.  Lower revenue, from lower commodity prices and higher input costs, would tend to create profitability challenges for farmers in the coming year, unlike 2011.

In the year ahead, Oppedahl, says, “The trend toward higher farmland values could ease in the second quarter of 2012, according to survey respondents. A third of the responding bankers expected farmland values to increase during the April through June period, while 1% expected declines. Nearly two-thirds of the respondents looked for farmland values to stabilize.

Despite the prospect for lower farm income, there is still strong farm income and that will continue to fuel the demand for farmland, say ag economists Jason Henderson and Maria Akers of the Kansas City Fed District.  They also saw higher land values in the first quarter of 2012, which has risen by 20% for two consecutive years.  In the Kansas City Fed District, first quarter land values were up 16% compared to a year earlier and one third of the bankers surveyed report the upward trend will continue over the next few months.

However, some of the increases within states are phenomenal.  Compared to year ago levels, irrigated farmland in Nebraska is up more than 40%, with a 38% rise in non-irrigated land.  Kansas farmland is selling for 24-26% more.  The Kansas City Fed economists expect the trend to continue based on reports from 235 local bankers.  They report, “Despite larger supplies, buyers remained willing to pay record prices at land auctions. Furthermore, survey respondents did not expect the farmland market to cool in the near future. About a third of District bankers anticipated farmland values would rise further while the remaining respondents expected farmland values to hold at peak levels.”

Through the heart of the Cornbelt the demand for land remains at a high level, and farmers are willing to pay an average of 20% more than they did a year ago.  Commercial bankers, surveyed by the Chicago and Kansas City Federal Reserve banks, indicate strong farm income has allowed farmers to repay debt and invest in farmland at record high prices.  Commercial lenders expected the trend to continue, based on recent land sales, the good farm economy, and the fact that more land is available to the market than in the past.

Posted by Stu Ellis on 05/23 at 11:41 PM | Permalink

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