Chicago Fed survey: Fourth year-over-year farmland value increase

CHICAGO — Midwest agricultural land values in the 7th Federal Reserve District had a year-over-year average gain of 20% in the third quarter of 2022.

This marked the fourth year-over-year increase in a row of at least 20% for farmland values in the Chicago-based district that includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin and Michigan’s Lower Peninsula.

Indiana led the way with a year-over-year surge in “good” farmland values of 29%, Iowa ag land values increased 22%, Illinois averaged a 20% increase and Wisconsin had a 12% year-over-year increase.

“After being adjusted for inflation with the Personal Consumption Expenditures Price Index, district farmland values were still up 13% in the third quarter of 2022 relative to a year ago,” said David Oppedahl, Chicago Fed senior business economist.

“This was the fifth consecutive quarter with at least as large a year-over-year increase in real farmland values. In nominal terms, the district’s agricultural land values in the third quarter of 2022 were 4% higher than in the second quarter.”

The information was garnered from a survey of 160 bankers in the Federal Reserve District.

Credit Conditions

“Agricultural credit conditions for the district showed improvement overall in the third quarter of 2022, although higher expenses due to rising interest rates cut into net farm incomes,” Oppedahl said.

Agricultural interest rates — in both nominal and real terms — increased rapidly during the third quarter of 2022.

As of Oct. 1, the district’s average nominal interest rates on new operating loans at 6.52% and feeder cattle loans at 6.58% were at their highest levels since the third quarter of 2008.

In addition, its average nominal interest rate on farm real estate loans at 6.13% was last higher in the second quarter of 2009.

In real terms, after being adjusted for inflation with the PCEPI, the average interest rate on farm operating loans was slightly above zero in the third quarter of 2022, after being in negative territory for the four previous quarters.

The average real interest rate on feeder cattle loans followed a similar trajectory over this period. Yet, the average real interest rate on farm real estate loans remained negative for the fifth quarter in a row.

Looking Forward

Sixty-eight percent of survey respondents anticipated district farmland values to stay the same in the final quarter of 2022, 25% anticipated them to rise and 7% anticipated them to fall.

Also, the survey respondents who expected farmers and non-farm investors to have stronger demand to acquire farmland this fall and winter compared with a year earlier outnumbered the respondents who expected these groups to have weaker demand.

“On the whole, respondents anticipated a rise in the volume of farmland transfers during this fall and winter relative to a year ago,” Oppedahl said.

Net cash earnings — which include government payments — for crop, cattle and hog farmers were expected to be up during the fall and winter from their levels of a year earlier, according to the responding bankers.

For crop farmers, 61% of survey respondents forecasted net cash earnings to rise over the next three to six months relative to a year ago, and 18% forecasted these earnings to fall.

For cattle and hog farmers, 28% of survey respondents expected net cash earnings to increase over the next three to six months relative to a year ago, and 21% expected these earnings to decrease.

The district’s dairy industry was expected to do less well, with 17% of responding bankers forecasting higher net cash earnings for dairy farmers over the next three to six months relative to a year earlier and 20% forecasting lower such earnings.

Loan Repayments

Twenty-five percent of the responding bankers predicted a higher volume of farm loan repayments over the next three to six months compared with a year earlier, while 7% predicted a lower volume.

Also, forced sales or liquidations of farm assets owned by financially distressed farmers were expected to decrease in the next three to six months relative to a year ago, according to 30% of the responding bankers. Only 4% expected them to increase.

“Even in a rising interest rate environment, the non-real-estate farm loan volume of the survey respondents’ banks was generally anticipated to be higher in the October through December period of 2022 than in the same period of 2021, yet their banks’ farm real estate loan volume was generally anticipated to be lower,” Oppedahl added.

In regard to the current situation facing Midwest agriculture, one Indiana banker noted, “Inputs are much above norms, and if commodity prices begin to fall, it will not be pretty. We still have good equity on most farms, but that can dissipate quickly.”