December 24, 2024

‘I’ state farmland values down from a year ago

Farmland values had risen in 18 consecutive quarters according to the Federal Reserve Bank of Chicago, but the latest quarter was flat to down slightly.

CHICAGO – For the first time since the end of 2019, farmland values in the 7th Federal Reserve District did not see a year-over-year increase.

The Federal Reserve Bank of Chicago released survey details in its November issue of AgLetter Insights.

“It’s been quite a run-up in farmland values in the past five years, and now it has petered out, it seems like,” said David Oppedahl, a Chicago Fed policy adviser, lead ag analyst and AgLetter co-author.

Values for “good” farmland in the 7th District overall were 2% lower in the third quarter of 2024 than in the second quarter, according to the respondents from 119 banks who completed the Oct. 1 survey.

Wisconsin had another year-over-year gain in farmland values, but only of 4%. Illinois, Indiana and Iowa had year-over-year decreases in farmland values of 1%, 2% and 1%, respectively.

“You look at Wisconsin, and there you still see solid numbers – a 4% increase in values from a year ago. That’s also smaller than it had been, but it’s still showing some strength there,” Oppedahl said. “Part of the reason is that the dairy sector has been doing well this year. It’s been doing much better than it had been, and that’s given some incentive for those operations to expand.”

An Indiana respondent said “inventory of farmland for sale in the area is still low.”

“The increases have gotten smaller and smaller, until they vanished. I think a huge factor in this is the decreases in farm incomes over the past few years,” Oppedahl said. “There were double-digit increases in farmland values back when there was a big jump up in farm incomes in 2020 and 2021. And now we’ve seen net farm incomes declining, especially crop incomes from corn and soybeans. So that’s lowered the demand for expansion and just made it tighter for operations.

“But you do still see examples of some farmers bidding up parcels to near-record levels. So, there are still some very high auctions out there, even with district farmland values generally growing less than before or declining.”

Credit conditions

Agricultural credit conditions for the 7th District softened in the third quarter of 2024. Agricultural interest rates, in both nominal and real terms, fell slightly during the third quarter of this year.

In the third quarter, the district’s average nominal interest rates on new operating loans, at 8.12%, feeder cattle loans, at 8.09%, and farm real estate loans, at 7.19%, had all fallen to their lowest levels since the first quarter of 2023.

“Meanwhile, in real terms (after being adjusted for inflation with the personal consumption expenditure price index), the average interest rates on farm operating, feeder cattle and farm real estate loans exhibited their first decline since beginning their run-ups back in the first quarter of 2022,” according to the report.

For the July through September period, repayment rates for non-real estate farm loans were lower than a year earlier.

The index of loan repayment rates was 76 in the third quarter of 2024 – and was last lower in the second quarter of 2020 – as 3% of responding bankers observed higher rates of loan repayment than a year ago and 27% observed lower rates.

Renewals and extensions of non-real estate agricultural loans were higher in the third quarter of 2024 than a year ago, with 32% of the responding bankers reporting more of them and 4% reporting fewer.

An Illinois banker noted that “low grain prices are definitely affecting borrowers’ ability to pay off operating loans.”

Farmland values had risen in 18 consecutive quarters according to the Federal Reserve Bank of Chicago, but the latest quarter was flat to down slightly.

Looking ahead

Another respondent from Illinois remarked that “lower net farm income and cash-flow difficulties will affect land values.”

In the third quarter of 2024, 55% of survey respondents considered farmland to be overvalued and 45% considered farmland to be appropriately valued. None viewed farmland as undervalued.

A decline was expected for 7th District farmland values in the final quarter of 2024 by 34% of survey respondents, while 2% expected them to rise and 64% expected them to be stable.

In line with these survey results, softer demand for agricultural land likely will extend into 2025; 45% and 35% of survey respondents expected farmers and non-farm investors, respectively, to have weaker demand to acquire farmland this fall and winter compared with a year earlier. Less than 20% expected these groups to have stronger demand.

Overall, respondents expect a drop in the volume of farmland transfers during this fall and winter relative to a year ago.

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

For crop farmers, 3% of survey respondents forecasted net cash earnings to rise over the next three to six months relative to a year ago, while 91% forecasted these earnings to fall.

For dairy farmers, 14% of survey respondents expected net cash earnings to increase over the next three to six months relative to a year ago, while 22% expected these earnings to decrease.

The district’s cattle and hog operations were expected to do about the same, with 22% of responding bankers forecasting higher net cash earnings for cattle and hog farmers over the next three to six months relative to a year earlier and 31% forecasting lower such earnings.

The livestock sector faced dim prospects for income growth, but nothing like the slump facing the crop sector.

Overall, 42% of the responding bankers predicted a lower volume of farm loan repayments over the next three to six months compared with a year earlier, while only 1% predicted a higher volume.

“Unsurprisingly, given income expectations, forced sales or liquidations of farm assets owned by financially distressed farmers were anticipated to rise in the next three to six months relative to a year ago, as 38% of the responding bankers anticipated them to increase and 2% anticipated them to decrease,” Oppedahl said.

Non-real estate loan volumes – specifically for operating loans, feeder cattle loans and loans guaranteed through the U.S. Department of Agriculture’s Farm Service Agency – were forecasted to be larger in the last three months of 2024 compared with the same three months of 2023.

Farm real estate loan volumes were forecasted to be smaller in the last three months of 2024 compared with the same three months of a year earlier.

Although dipping farm interest rates could help some, agricultural credit conditions were expected to keep weakening as farm incomes, for the most part, keep shrinking.

The 7th District of Chicago includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin and Michigan’s Lower Peninsula.

Tom Doran

Tom C. Doran

Field Editor