Slower rise in district farmland values

CHICAGO — Farmland values in the Seventh Federal Reserve District are slowing down from double-digit increases of the last couple years to single-digit annual percentage increases.

The Federal Reserve Bank of Chicago’s AgLetter reported the district saw an average increase of 6% year-over-year of agricultural land values.

Values for “good” farmland in the district increased 2% from the third to the fourth quarter, according to 129 ag bankers responding.

The Seventh Federal Reserve District includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin and Michigan’s Lower Peninsula.

Wisconsin’s ag land values increased 14% from Jan. 1, 2023, to Jan. 1, 2024. Indiana was up 7%, Illinois increased by 4%, and Iowa decreased by 1% within the district during that same timeframe.

Wisconsin bankers noted in the survey that “non-farm pressures still exist, notably solar” and “there is not a lot of farmland available for sale.”

“With Illinois and Indiana having single-digit increases, annual agricultural land value changes for those two states were lower in 2023 than in 2022. Iowa had a small, single-digit annual decrease in farmland values for its first decline in the last five years,” said David Oppedahl, Chicago Fed policy adviser and newsletter author.

“Adjusted for inflation by the Personal Consumption Expenditures Price Index, district farmland values had an annual increase of 2.2% in 2023, the smallest real increase seen after 2019. District farmland values rose to a new peak in 2023, 15% above their 2013 peak in real terms and up 44% from their 2013 peak in nominal terms.”

Looking Back

A widespread drought in the district contributed to uncertainty about 2023 corn and soybean production, but the lack of moisture did not end up dramatically decreasing yields as had happened during the 2012 drought.

Based on calculations using U.S. Department of Agriculture data, district corn yields decreased slightly in 2023, down just 0.3% from 2022 yields; soybean yields actually edged up 0.4%.

Harvested corn acres were up 3% in 2023 from 2022, while harvested soybean acres were down 4%. Corn production by district states increased 3%, reaching 6.78 million bushels, its highest level since 2016.

Meanwhile, soybean production by district states fell almost 4%, to 1.75 million bushels. National corn stocks increased 12% from 2022, while soybean stocks decreased nearly 1%.

The increase in corn stocks led to a decline in the USDA projected prices for the 2023-2024 crop year, which fell to $4.80 per bushel for corn, down 27% from the previous crop year.

Soybean prices were projected to be $12.65 per bushel, down 11%, in part because of higher projections for global soybean production.

Using these prices, estimated revenues for the district states’ 2023 harvest would be down 24% for corn and 14% for soybeans from their 2022 levels. Prices for livestock products were lower at the end of 2023, as well.

In December 2023, the index of prices for livestock and associated products was down 14% from 2022; the price of cattle was up 11% from a year earlier, while prices for hogs and milk were down 15% and 16% from a year earlier, respectively. Egg prices fell 58% from the year prior.

Using the USDA’s February assessment for 2023, net farm income for the nation was projected to decline by 16%, or $30 billion, from 2022, partly because of decreasing farm cash receipts and government payments, plus increasing materials expenses.

Real farm income has come down from its high in 2022, remaining well above 2020 levels and just below 2021 levels.

According to an Illinois respondent, “Ultimately, 2023 will end up as a profitable year, but because of the drought concerns during the summer, the amount of prepriced grain was lower than it should have been.”

“So, even though the drought did not impact yields as much as anticipated, selling a portion of harvested crops at lower prices did negatively impact farm financial positions,” Oppedahl added.

Credit Conditions

Reversals in agricultural credit trends for the Seventh District were a dominant theme at the end of 2023. District agricultural credit conditions showed signs of deterioration during the fourth quarter of 2023.

In the final quarter of 2023, repayment rates for non-real estate farm loans were slightly lower than a year ago, plus loan renewals and extensions were higher than a year earlier.

Just over 1% of agricultural borrowers were not likely to qualify for operating credit at the survey respondents’ banks in 2024 after qualifying in the previous year.

Non-real estate farm loan demand relative to a year ago picked up for the first time in 14 quarters.

For the third time in a row, there were fewer funds available for lending than in the same quarter of the prior year at survey respondents’ banks in the final quarter of 2023.

The average loan-to-deposit ratio for the district was nearly unchanged at 74% in the fourth quarter of 2023.

“At the end of 2023, the Seventh District’s average nominal interest rates on farm operating, feeder cattle, and farm real estate loans were roughly the same as at the end of the third quarter of last year and still at or near their highest levels in over 16 years. Even so, average real rates rose for all three kinds of loans tracked by the survey,” Oppedahl said.

Agricultural interest rates in nominal terms did not change much during the fourth quarter of 2023.

As of Jan. 1, 2024, the district’s average nominal interest rates were 8.51% on new operating loans, 8.49% on feeder cattle loans, and 7.6% on farm real estate loans. In real terms, after being adjusted for inflation, the average interest rates for all three types of agricultural loans leaped higher in the fourth quarter of 2023.

Average real interest rates on new operating and feeder cattle loans were last higher at the end of the third quarter of 2009, and the average real interest rate on new farm mortgages was last higher at the end of the fourth quarter of 2009.

An Iowa respondent observed: “We have seen a decrease in working capital as a result of lower grain prices and higher interest rates. Higher interest rates have also reduced capital expenditures among our ag customers.”

Looking Forward

Another Iowa banker succinctly warned of “tough times ahead.” In line with this thinking, survey respondents at the start of 2024 predicted capital expenditures by farmers would be lower in the year ahead than in the year just ended for land purchases or improvements, buildings and facilities, machinery and equipment, and trucks and autos.

According to survey respondents at the beginning of 2024, 1.3% of their farm customers with operating credit in the year just past were not likely to qualify for new operating credit in the year ahead, slightly above the survey’s level at the start of 2023.

Farm real estate loan volumes were forecasted to be smaller in the first three months of 2024 compared with the same three months of 2023.

However, non-real-estate loan volumes — specifically for operating loans and loans guaranteed through the USDA’s Farm Service Agency — were forecasted to be larger in the first three months of 2024 compared with the same three months of a year earlier.

An Illinois banker commented that “the need for operating credit will increase with tighter working capital positions from a year ago.”

There were fewer responding bankers, at 6%, who projected agricultural land values to go up in the next quarter — in this case, the first quarter of 2024 — than those who predicted them to go down, at 17%; 77% of the respondents projected them to be unchanged.

Stable farmland values for the first quarter of 2024 were the consensus of survey participants, with 2024 looking to be a more challenging year for agriculture.