Federal Reserve survey: Farmland values increase slows

CHICAGO — Farmland values rose slightly year-over-year and from the first to the second quarter of 2023 in the Seventh Federal Reserve District, according to a survey.

The Federal Reserve Bank of Chicago released the latest survey-based data in its Aug. 10 AgLetter.

Farmland values for the Seventh District rose 9% in the second quarter of 2023 from a year earlier. This year-over-year gain was the smallest one since the first quarter of 2021.

Values for “good” agricultural land were up 3% in the second quarter of 2023 from the first quarter, according to survey responses from 153 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.

“Once again, Indiana exhibited the largest year-over-year increase in agricultural land values with a 23% increase. Illinois (9%), Iowa (2%), and Wisconsin (8%) exhibited more modest year-over-year gains than Indiana, having tailed off from their stronger gains of previous recent quarters,” according to report author David Oppedahl, Federal Reserve Bank of Chicago policy adviser.

One Iowa banker noted: “Low-quality land values are stronger than a year ago due to non-farm investors. Medium-quality values are showing some weakness recently. High-quality land values are still strong.”

“Higher farmland values seemed to reflect the strong financial conditions of the past couple of years, rather than the relatively weaker current situation. Agricultural prices were lower in June 2023 than in June 2022, yet they were still generally higher than in June 2021,” Oppedahl said.

The U.S. Department of Agriculture’s June index of prices received by farmers was down 5% from a year ago, but up 19% from two years ago. Of particular relevance to the Seventh District were the June corn, soybean, hog and milk prices, which were down 12%, 13%, 17%, and 33% from a year ago, respectively.

“Corn and soybean prices were lower than a year ago, even though an expanded drought threatened much of the nation’s primary growing region for these crops and uncertainties surrounded Ukraine’s grain exports. These factors, which could lower supplies — and push up prices — were offset by the large output of corn and soybeans in South America, along with a still sizable harvest anticipated for the Midwest despite the drought,” the report said.

Credit Conditions

The survey also noted overall agricultural credit conditions in the second quarter of 2023 improved from a year ago yet again, although interest rates on farm loans continued to move up.

As of July 1, 2023, the Seventh District’s average nominal interest rates on new operating loans (8.24%), feeder cattle loans (8.19%), and farm real estate loans (7.33%) were at their highest levels since the third quarter of 2007.

In real terms — after being adjusted for inflation with the Personal Consumption Expenditures Price Index — these agricultural interest rates increased rapidly during the second quarter of 2023, as inflation decreased.

The average real interest rate for farm real estate loans continued to rise more sharply in the second quarter of 2023 than the average nominal interest rate — in line with the pattern that began in the third quarter of 2022. The average real interest rates on farm operating and feeder cattle loans followed similar patterns.

Even though the average nominal farm real estate loan rate has been well above its pre-COVID levels for over a year, the inflation-adjusted rate just surpassed its level from the start of 2020 during the third quarter of 2023.

Repayment rates for non-real-estate farm loans continued to improve slightly. Twelve percent of responding bankers noted higher rates of loan repayment than a year ago and 7% noting lower repayment rates.

The current streak of 11 quarters with year-over-year improvements in loan repayment rates was the second longest in the index’s history.

The share of farm loans with “major” or “severe” repayment problems in the Seventh District’s agricultural loan portfolio, as measured in the second quarter of every year, was 1.3% — which represented the lowest such reading ever.

In addition, renewals and extensions of non-real-estate farm loans during the April through June period of 2023 were lower than during the same period of a year earlier, as 5% of survey respondents reported more of them and 9% reported fewer.

In the second quarter of 2023, demand for non-real estate farm loans was down from a year ago for the 12th quarter in a row, with 19% of survey respondents observing demand for non-real-estate farm loans above the level of a year ago and 42% observing demand below that of a year ago.

Looking Ahead

A majority of survey respondents were of the view that Seventh District farmland was overvalued. Only a single respondent was of the view that it was undervalued.

Looking ahead to the third quarter of 2023, just 9% of survey respondents anticipated farmland values to rise, 86% anticipated them to be stable, and 5% anticipated them to fall.

According to one Michigan banker, “given the increase in interest rates and the lower commodity markets, coupled with lackluster export sales, I would expect land values to weaken.”

Survey respondents expected lower volumes of farm loans in the third quarter of 2023 compared with year-earlier levels, except for operating loans.

Farm operations could be increasingly in need of greater liquidity from operating loans on account of expectations of lower 2023 net farm income. As one Iowa banker put it, the “general outlook has become more guarded.”