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Editor’s note: The following was written by David B. Oppedahl, senior business economist at the Federal Reserve Bank of Chicago, for the May 2018 AgLetter.

Agricultural land values for the Seventh Federal Reserve District showed signs of stabilizing in the first quarter of 2018, as farmland values were unchanged from a year ago.

On average, “good” farmland values in the first quarter of 2018 rose 1 percent from the fourth quarter of 2017, according to the survey responses of 181 district agricultural bankers.

Farmland values

This quarterly increase in district agricultural land values marked the fifth quarter in a row without a decline.

Illinois and Michigan (the latter based on a handful of responses) were the only district states to experience year-over-year decreases in farmland values. Remarkably, Wisconsin has not seen a year-over-year decrease in farmland values since the second quarter of 2015.

Farmland markets saw supply rising a bit, but demand and sales slipping. There was an increase in the amount of agricultural land for sale during the most recent winter and early spring relative to a year ago, as 27 percent of the responding bankers reported more farmland was up for sale in their areas and 23 percent reported less.

With 18 percent of the survey respondents reporting higher demand to purchase farmland and 20 percent reporting lower demand, there was almost an even split among those that perceived a shift in interest on the part of buyers in the three- to six-month period ending with March 2018 relative to the same period ending with March 2017.

Although some respondents commented about additional investor interest in farmland, survey participants indicated that the farmers’ share of farmland acres purchased (relative to the investors’) was roughly the same in the three- to six-month period ending with March 2018 vs. the same period ending with March 2017.

With cash rentals making up 80 percent of district agricultural land operated by someone other than the owner, changes in their terms are a key indicator of agricultural conditions. Cash rental rates for farmland in the district decreased 5 percent for 2018 relative to 2017 — the smallest decline in four years. For 2018, average annual cash rents to lease farmland were down 5 percent in Illinois, 3 percent in Indiana, 6 percent in Iowa, 3 percent in Michigan and 7 percent in Wisconsin.

Cash rental charts

Even so, an Iowa banker said, “Land rental rates are status quo to slightly lower, but demand limits a reduction in rent per acre.”

There seemed to be enough farmers willing to take on more acres to plant, such that cash rents did not fall as much as they would have otherwise. Meanwhile, other farmers quietly ended their rental contracts, even defaulting on payments to landowners in some cases.

After five years of falling cash rents, the district’s index of real cash rental rates was cut by a third, the largest such decline since the 1980s.

Furthermore, the change in the index of inflation-adjusted farmland cash rental rates underperformed the change in the index of inflation-adjusted agricultural land values for the ninth consecutive year. The results show that 2018’s real cash rental rates were 26 percent below their level in 1981, while real farmland values were still 67 percent above their 1981 level.

Chicago Fed Farmland prices

Hence, the implication is that relatively stronger demand to own farmland than to lease it has kept farmland values from falling as much as the earnings potential of farmland (represented by cash rental rates).

In March 2018, corn and soybean prices were about the same as a year ago, according to data from the USDA. However, the five-year drops in real corn and soybean prices were 54 percent and 37 percent, respectively.

Since these price decreases would have resulted in greater declines in crop revenues than observed in cash rents over the past five years (all else being equal), farm operations needed productivity gains through higher yields and cost-cutting measures in order to preserve working capital and maximize cash flows.

Credit conditions

According to an Illinois banker, “We are seeing working capital dropping significantly, but for the most part our borrowers are financially stable and able to cope with the low grain prices.”

In line with this comment, unsurprisingly, the district’s agricultural credit conditions stumbled in the first quarter of 2018 relative to the first quarter of 2017.

District agricultural credit conditions tightened further during the first quarter of 2018.

Once more, repayment rates for non-real-estate farm loans were down from a year ago, and renewals and extensions of these loans were up from a year earlier. Demand for non-real-estate loans in the first quarter of 2018 was higher than a year ago, while the availability of funds to lend was somewhat lower.

Looking forward

Most survey respondents expected agricultural land values to be unchanged in the second quarter of 2018: 75 percent of responding bankers anticipated farmland values to be stable, 19 percent anticipated a decline, and 6 percent anticipated an increase.

Farm real estate loan volumes were forecasted to be generally the same in the second quarter of 2018 as in the second quarter of 2017, with 14 percent of survey respondents predicting higher levels of lending for farm real estate and 14 percent predicting lower levels.

While responding bankers forecasted higher volumes for operating loans and FSA-guaranteed loans, they forecasted lower volumes for grain storage loans, farm machinery loans, dairy loans and feeder cattle loans.