Farmland values continue to rise
Climbing 20% in the third quarter of 2022 from a year ago, farmland values in the Federal Reserve’s Seventh District maintained its upward momentum. In addition, the value of “good” farmland across the district was 4% higher in the third quarter of 2022 than in the second quarter, according to the 160 bankers who responded to the Oct. 1 survey. About two-thirds of survey respondents expected the district’s farmland values to be flat in the fourth quarter of 2022, but 25% expected the district’s farmland values to rise again in the final quarter of 2022. this year and 7% expected it to decrease.
Overall, agricultural credit conditions in the district were better in the third quarter of 2022 than a year earlier, despite the sharp increase in average interest rates on agricultural loans. Repayment rates for non-real estate agricultural loans were higher compared to the same quarter of the previous year for the eighth consecutive quarter. In addition, renewals and extensions of these loans were fewer than a year ago. In the third quarter of this year, demand for non-real estate agricultural loans fell from a year ago for the ninth consecutive quarter. Notably, the availability of funds for lending by agricultural banks was lower than in the third quarter of 2021. The average loan-to-deposit ratio for the district increased to 68.2% in the third quarter of 2022.
With farm income still strong, the district posted a 20% year-over-year gain in the value of its farmland in the third quarter of 2022. This was the fourth consecutive year-over-year increase on the other by at least 20%. for district farmland values. Indiana led the way with a 29% year-over-year increase in farmland values; the other states in the district also saw double-digit year-over-year growth in farmland values. After being adjusted for inflation with the personal consumption expenditure price index, the district’s farmland values rose another 13% in the third quarter of 2022 compared to a year ago; it was the fifth consecutive quarter with at least as large a year-over-year increase in real farmland values. In nominal terms, the value of farmland in the district in the third quarter of 2022 was 4% higher than in the second quarter.
Even though spring planting delays and summer drought have reduced the district and state’s harvest potential, 2022 has proven to be another high production year. An Iowa banker reported that “the harvest to date has exceeded most expectations in light of the drought conditions.” For the five states in the district, corn and soybean yields in 2022 were the second best ever — slightly behind the records set in 2021 — according to data from the U.S. Department of Agriculture.
In October, the USDA forecast that the 2022 grain corn and soybean crops for the five states in the district would decline 2 and 3 percent, respectively, from the 2021 crops. The price of corn in September 2022 was 2 percent lower than that of August, but still 30% higher than that of a year ago. Similarly, the price of soybeans in September this year was 8% lower than in August, but 16% higher than a year earlier. In October, the USDA released price forecasts for the 2022-23 crop year of $6.80 per bushel for corn and $14 per bushel for soybeans. Thus, when calculated using these price estimates, projected 2022 district state corn and soybean crop revenues would exceed 2021 record highs by 11% and 3%, respectively.
Additionally, the USDA price index for livestock and animal products rose 26% in September 2022 from a year earlier.
Compared to a year ago, average prices increased in September 2022.
Therefore, increased livestock and crop incomes appeared to have a positive impact on farmland values, although farmers also faced inflated expenses for farms and their households.
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Credit conditions are improving
Farm credit conditions for the district showed an overall improvement in the third quarter of 2022, although increased spending due to rising interest rates reduced net farm income. Farm interest rates – in nominal and real terms – have been rising rapidly during the third quarter of 2022. As of October 1, district average nominal interest rates on new farm loans at 6.52% and feeder cattle loans at 6.58 percent were at their highest levels since the third quarter of 2008. In addition, its average nominal interest rate on agricultural real estate loans at 6.13 percent was the last higher than in the second quarter of 2009. In real terms after adjusting for inflation, the average interest rate on farm loans was around zero in the third quarter of 2022, after being in territory negative over the previous four quarters. The average real interest rate on feeder cattle loans followed a similar trajectory over this period. Yet the average real interest rate on agricultural mortgages remained negative for the fifth consecutive quarter.
For the July-September 2022 period, non-home agricultural loan repayment rates were again higher than a year earlier. The loan repayment rate index was 121 in the third quarter of 2022, with 23% of responding bankers seeing an increase in loan repayment rates from a year ago; 2% observed lower rates. Additionally, renewals and extensions of non-real estate agricultural loans were lower in the third quarter of 2022 than a year ago, with only 3% of responding bankers reporting more and 15% reporting less. Collateral requirements for loans in the third quarter of 2022 increased slightly compared to the same quarter of 2021, as 6% of survey respondents indicated that their banks required more collateral and 1% said that their banks in demanded less.
In the third quarter of 2022, the district experienced lower demand for non-real estate agricultural loans compared to a year ago; this was the ninth consecutive quarter of such weak demand. The loan demand index was 91 in the third quarter of 2022, with 25% of survey respondents noting increased demand for non-real estate agricultural loans compared to the previous year and 34% noting less demand. . The availability of funds for lending by agricultural banks was less than a year ago for the first time since the second quarter of 2019. The funds availability index fell to 96 in the third quarter of 2022, 21% of survey respondents who said their banks had more funds available to lend than a year earlier and 25% said their banks had less.
The district’s average loan-to-deposit ratio increased to 68.2% in the third quarter of 2022. The gap between the average loan-to-deposit ratio and the average level desired by responding bankers was 12 percentage points; additionally, 78% of survey respondents said their respective banks were below target levels.
Sixty-eight percent of survey respondents expected the district’s farmland values to remain the same in the last quarter of 2022; 25% expected them to increase and 7% expected them to decrease. Additionally, survey respondents who expected farmers and non-farm investors to have stronger demand for farmland this fall and winter compared to the previous year outnumbered respondents who expected these groups to have lower demand. Overall, respondents anticipated an increase in the volume of farmland transfers this fall and winter compared to a year ago.
According to the responding bankers, net cash incomes, which include government payments, for farmers, cattle and hog producers are expected to rise over the fall and winter from their levels in the last year.
• For farmers, 61% of survey respondents expected net cash income to increase over the next three to six months compared to a year ago, and 18% expected net cash income to decrease.
• For cattle and hog producers, 28% of survey respondents expected net cash income to increase in the next three to six months compared to a year ago, and 21% expected these revenues to decline.
• The dairy industry in the district was expected to fare less well, with 17% of bankers responding expecting an increase in net cash income for dairy farmers over the next three to six months compared to the year previous year and 20% predicting a drop in these revenues.
Twenty-five percent of bankers surveyed predicted a greater volume of agricultural loan repayments over the next three to six months compared to the previous year, while 7 percent predicted a reduction in volume. In addition, forced sales or liquidations of agricultural assets belonging to financially distressed farmers are expected to decrease over the next three to six months compared to a year ago, according to 30% of responding bankers; only 4% expected them to increase.
Even in a rising interest rate environment, the volume of non-real estate agricultural lending by survey respondents’ banks was generally expected to be better during the October-December 2022 period than during the same period of 2021; yet it was generally expected that the volume of agricultural real estate loans from their banks would be lower. Regarding the current situation facing Midwestern agriculture, an Indiana banker noted, “Inputs are well above standard, and if commodity prices start to fall, it won’t won’t be pretty. We still have good equity on most farms, but that can dissipate quickly. »
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David B. Oppedahl is a policy adviser to the Federal Reserve Bank of Chicago, one of 12 regional reserve banks which, along with the Board of Governors in Washington, DC, constitute the nation’s central bank. The Chicago Reserve Bank serves the Seventh Federal Reserve District, which encompasses northern parts of Illinois and Indiana, southern Wisconsin, the Lower Peninsula of Michigan, and the state of Iowa. In addition to participating in the formulation of monetary policy, each Reserve Bank supervises member banks and bank holding companies, provides financial services to depository institutions and the U.S. government, and monitors economic conditions in its district. Visit www.chicagofed.org for more information.