Chicago Fed survey: Farmland values continue to increase

CHICAGO — Farmland values jumped 23% in the first quarter of 2022 compared to a year ago, continuing the recent streak of sharp year-over-year gains in the 7th Federal Reserve District.

“Furthermore, ‘good’ farmland values in the district increased 4% from the fourth quarter of 2021 to the first quarter of 2022, according to the survey responses of 136 district agricultural bankers,” said David Oppedahl, Federal Reserve Bank of Chicago’s senior business economist.

From April 1, 2021, to April 1, 2022, Iowa “good” farmland values increased 28% on average, Indiana was up 23%, Illinois saw an 18% increased within the district and Wisconsin was 13% on average higher.

The findings were from a survey conducted by the Federal Reserve Bank of Chicago and reported in The AgLetter.

The Chicago district includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin and Michigan’s Lower Peninsula.

Even 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 2022 was higher than that for any quarter since the first one of 2012.

The gain for the first quarter of 2022 also marked the eighth consecutive quarter of positive changes in real terms.

High Demand

Continued robust increases in district agricultural land values partly reflected the vigorous demand for agricultural land. According to an Illinois banker, there was “high demand for quality farmland.”

For the three- to six-month period ending with March 2022 relative to the same period ending with March 2021, 78% of the survey respondents reported higher demand to purchase farmland and just 1% reported lower demand.

Sustained strong demand for agricultural ground and higher transaction prices seemed to induce selling; there was a larger amount of land for sale during the most recent winter and early spring relative to a year ago — 48% of the responding bankers reported more farmland was up for sale in their areas and 16% reported less.

Similarly, the number of farms and the amount of acreage sold were also up in the winter and early spring compared with a year earlier.

“Survey participants implied that the share of acres purchased by investors expanded in the three- to six-month period ending with March 2022 relative to the corresponding period ending with March 2021, given that the share of acres purchased by farmers contracted. In this vein, an Iowa banker reported ‘a notable increase in investor activity in our area,’” Oppedahl said.

Credit Conditions

Agricultural credit conditions for the district improved once more in the first quarter of 2022.

“As of April 1, 2022, the average nominal interest rates on operating loans (4.64%), feeder cattle loans (4.74%) and agricultural real estate loans (4.44%) were higher than at any time since 2020,” Oppedahl reported.

“Yet, after being adjusted for inflation using the PCEPI, average agricultural interest rates decreased for the seventh quarter in a row. In real terms, average interest rates for farm real estate and feeder cattle loans were last lower at the end of the fourth quarter of 1974; the average real interest rate for farm operating loans — tracked by the survey since the third quarter of 1975 — was at its lowest ever.”

The index of repayment rates for non-real-estate farm loans reached the highest level in its history going back to 1970; 59% of responding bankers observed higher rates of repayment for the first quarter of 2022 relative to the first quarter of 2021, and none observed lower rates.

Also, only 3% of the survey respondents reported higher levels of loan renewals and extensions over the January through March period of 2022 compared with the same period last year, while 32% reported lower levels of them.

In addition, bankers reported that only 1%, on average, of their farm borrowers had more carryover debt — loans not paid off at the end of the growing season and subsequently carried over into the next one — in 2022 than in 2021.

The share of loans guaranteed by the USDA’s Farm Service Agency in the portfolios of the reporting banks was just above 6% for the district as a whole — about the same level as in the past couple of years.

Looking Forward

“Survey respondents forecasted that the volume of farm real estate loans would rise in the district during the April through June period of 2022 relative to the same period of 2021, but they forecasted that the overall volume of non-real-estate farm loans would decline,” Oppedahl noted.

The volumes of some non-real estate agricultural loan types — farm machinery and grain storage construction loans — were expected to be largely unchanged from a year ago.

But the volumes of others — operating, FSA-guaranteed, dairy and feeder cattle loans — were expected to decrease.

Around 75% of survey respondents in Illinois, Indiana and Iowa were of the view that agricultural ground was overvalued, yet the majority of respondents in Michigan and Wisconsin were not. None of the respondents viewed farmland as undervalued.

Looking ahead to the second quarter of 2022, 48% of survey respondents anticipated farmland values to rise, 51% anticipated them to be stable and 1% anticipated them to fall.

“If commodity prices soften and interest rates continue to increase, a decline in real estate values would be anticipated,” according to an Illinois banker.