Farmland values on firm ground: Double-digit value trend continues

CHICAGO — Midwest farmland values continued an upward trend, but slowed in the first quarter, according to a survey in the Seventh Federal Reserve District.

“Despite experiencing its smallest year-over-year gain (10%) in agricultural land values since the second quarter of 2021, the district still extended its streak of double-digit farmland value increases to eight quarters in the first quarter of 2023,” said David Oppedahl, AgLetter author and policy adviser at the Federal Reserve Bank of Chicago.

The survey is based on responses of 148 district agricultural bankers. The Seventh District includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin and Michigan’s Lower Peninsula.

Farmland values rose 2% in the first quarter of this year from the fourth quarter of last year.

After being adjusted for inflation with the Personal Consumption Expenditures Price Index, the year-over-year gain in district farmland values for the first quarter of 2023 was 5%, the 10th consecutive quarter of real increases that were at least as large.

The Indiana area that’s part of the Seventh District saw the largest year-over-year increase at 22%, followed by a 15% increase in Wisconsin, 11% in Illinois and 7% in Iowa.

Demand

One Wisconsin banker noted in the survey that “with high demand, strong commodity prices and fewer farms available for sale,” farmland values continued to rise.

For the three- to six-month period ending with March 2023 relative to the same period ending with March 2022, 35% of the survey respondents reported higher demand to purchase farmland and 16% reported lower demand.

Despite this firm demand for agricultural ground, there was a smaller amount of land for sale during the most recent winter and early spring compared with a year ago; 22% of the responding bankers reported more farmland was up for sale in their areas and 33% reported less.

“Similarly, the number of farms and the amount of acreage actually sold were also down in the winter and early spring relative to a year earlier,” Oppedahl noted.

According to survey participants, the share of acres purchased by farmers in the three- to six-month period ending with March 2023 was similar to that in the corresponding period ending with March 2022, implying that the share of acres purchased by investors was similar in both periods, as well.

Credit Conditions

“In the first quarter of 2023, agricultural credit conditions for the district were once again in good shape, despite the jump in farm interest rates over the past year,” Oppedahl said.

“As of April 1, 2023, the average nominal interest rates on operating loans (7.97%), feeder cattle loans (7.93%) and agricultural real estate loans (7.14%) were higher than at any time since the third quarter of 2007.

“Yet, after being adjusted for inflation using the PCEPI, average agricultural interest rates had only reached levels last seen in the first quarter of 2021.”

The index of repayment rates for non-real-estate farm loans indicated improvement for the 10th quarter in a row; 26% of responding bankers observed higher rates of repayment for the first quarter of 2023 relative to the first quarter of 2022 and 3% observed lower rates.

Also, only 1% of the survey respondents reported higher levels of loan renewals and extensions over the January through March period of 2023 compared with the same period last year, while 15% reported lower levels of them.

Yet bankers reported a doubling to 2%, on average, of their farm borrowers having more carryover debt — loans not paid off at the end of the growing season and subsequently carried over into the next one — in 2023 than in 2022.

The share of loans guaranteed by the USDA’s Farm Service Agency in the portfolios of the reporting banks across the district was just under 6% — nearly the same level as in the past several years.

Looking Ahead

According to an Illinois banker, their typical farmer has “very little need to borrow” and “plenty of cash on hand.”

This seemed to be the situation across much of the district, since survey respondents forecasted that the volume of both farm real estate and non-real-estate loans would fall in the district during the April through June period of 2023 relative to the same period of 2022.

“In 2023, most survey respondents from Illinois, Indiana and Iowa viewed agricultural ground as overvalued, albeit with slimmer majorities than in 2022 among those from Illinois and Iowa,” Oppedahl said, noting Indiana’s data were essentially the same this year as last year.

In both 2022 and 2023, overwhelming majorities of respondents from Michigan and Wisconsin did not view farmland as overvalued.

“Looking ahead to the second quarter of 2023, 15% of survey respondents anticipated farmland values to increase, 78% anticipated them to be stable and 7% anticipated them to decrease. Hence, survey responses suggested slower growth for district agricultural land values in the next quarter,” Oppedahl said.