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Sunday, August 18, 2013

Land Values:  Are They Nearing Their Top?


Has the pause button been pushed on the rapid ascent of farmland values?  That may be a reasonable question when examining the recent trends throughout much of the Cornbelt, as recorded by the regional Federal Reserve Banks.  Prices of good farmland are higher than last year, as reflected by the double-digit jumps in recent years. But when prices are compared to prior quarters, the increases are not as striking.  Although it is a small sample, the beginning of a trend may be apparent.


Federal Reserve Bank economists have regularly been surveying commercial bankers throughout their service territory about farmland values, credit conditions, and other factors reflective of the farm economy.  Within the Cornbelt, the primary Federal Reserve banks are headquartered in Chicago, St. Louis, and Kansas City.



The Chicago Fed’s August Ag Letter  indicates that for the second quarter of 2013, the value of “good” farmland was 17% higher than for the similar quarter of 2012.  However, those values were steady, when the second quarter was compared to the first quarter of 2013. The data comes from a survey of 211 commercial bankers, and the last time the value of farmland was steady in the quarterly surveys was in 2009.  What is even more telling is that the 7% of bankers who believe land prices will rise was offset by a similar 7% believing them to fall.  The remaining 86% of bankers in the Chicago Fed District anticipate no change in land values from the second quarter to the third quarter of the year.  The Chicago Fed serves the entire states of Iowa and Michigan, the northern two-thirds of Illinois and Indiana, the southeastern two-thirds of Wisconsin.  Fed economist David Oppedahl said, “So, while the farmland values on a year-over-year basis still appeared to be soaring, changes in farmland values on a quarterly basis may be presaging shifts in the year-over-year pattern in the latter half of 2013.”  Additionally, he quoted one banker who said to look for land values to go down along with grain markets.  And Oppedahl added, “The anticipation of lower crop revenues—especially when combined with potentially rising interest rates on farm loans—portended softness in future farmland values.”


St. Louis

The St. Louis Federal Reserve District has published its quarterly survey and reports that land values in the mid-South are still rising.  Serving portions of IL, IN, KY, TN, MS, AR, and MO, the St. Louis bank reports quality farmland values averaged $5,672 in the second quarter of 2013, compared to $5,111 in the first quarter of the year.  While that is an 11% increase from quarter to quarter, it compares to a 20.6% increase when the second quarter of 2013 is compared to the second quarter of 2012.  Fed economists in St. Louis, who surveyed commercial bankers for the land value data, also reported expectations for trends to continue. “A proportionately larger number of respondents expect quality farmland and ranch or pastureland land values to increase in the third quarter relative to a year earlier.”  The economists also noted that farm rental relationships may be moving toward more of a risk sharing arrangement due to economic uncertainties.  They wrote, “Respondents expect quality farmland and ranch or pastureland cash rents to increase during the third quarter from a year earlier. However, anecdotal information collected from other sources suggests some shift in cash rents toward a variable or profit-sharing basis.”


Kansas City

The Kansas City Federal Reserve District’s latest report reflects higher land values, but underlying caution about what is around the corner.  For irrigated cropland in the region that includes KS, NE, MO, and OK, prices were 25% higher than they were a year ago.  At the same time non-irrigated cropland rose 18% in value, except in drought-weary regions were values were only 14% higher.  The gains come even as farm income in many states is declining, in part due to reduced revenues for grain and losses in the beef market. The commercial bankers surveyed by the Kansas City Fed economists reported that values for land were higher due to the low interest rates and lack of debt within the agricultural community, but the levels for land values may have reached a peak.  Most of the bankers told the Kansas City Fed that farmland values would remain where they are, and more of the survey respondents believed they have peaked. The bankers who believe land values will continue to rise are fewer in each of the surveys taken recently by the bank’s economists.  For those expecting a decline, that decline is less than 10%.



While land values are higher this year than last year, parts of the Cornbelt are seeing a more leveling of land values.  There has been no widespread decline, and commercial bankers working with agriculture are not forecasting a decline.  But surveys of those individuals are indicating a peak in land values is either occurring or may be occurring soon.  The lower market for grain will have a significant impact on prices that are paid for farmland.



Posted by Stu Ellis on 08/18 at 11:38 PM | Permalink

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