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FARM CREDIT CONDITIONS SLIP; LAND VALUES OUTPACE CASH RENT

Despite falling farm incomes, farmland values are still holding up pretty well, although that appears to have more to do with a lack of land for sale rather than strong demand. Meanwhile, farm credit conditions continue to deteriorate.

The Federal Reserve’s Chicago branch reported that the value of “good” farmland in the district was up 4% from a year ago in the first quarter, and up 2% from the prior quarter. This is based on their quarterly survey of ag bankers. The district includes the “I” states as well as much of Wisconsin and Michigan. The strongest gains, for the year and the quarter, were in Wisconsin, which saw a 3% jump from the prior quarter and 10% year-over-year.

The strength in farmland values continues despite deteriorating crop prices. That’s one reason that cash rents are up a more modest 2% year-over-year. Adjusted for inflation, farmland values were up 1% year-over-year, the 16th straight quarter of gains. Cash rents, however, were down slightly. As the chart shows, this is continuing as a longer-term trend. The Chicago Fed calculates that while real (adjusted for inflation) farmland values are up 15% since 2013, cash rents are actually down 34% during that period.

Increasing pressure on crop producers is also seen in declining loan repayment rates, along with increased loan renewals and extensions. The loan-to-deposit rate in the district jumped 2.1% in the quarter, to 76.1%.

The Kansas City Fed, which released their own survey of credit conditions this week, reported similar trends, along with an uptick in carryover debt and loan restructuring to meet liquidity needs. The K.C. Fed noted that in the district’s main crop producing states — Missouri, Nebraska and Kansas — more than 70% of respondents reported lower farm income from the prior year, while in the district’s “mountain” states, less than a third reported lower farm income. One banker from Southwest Kansas told the K.C. Fed that, “Low crop prices will be a struggle for our producers. Producers will need to do an exceptional job of marketing their crops to have a successful year.” Overall, non-irrigated farmland values were up 6.0% from a year ago, while ranchland was up 9.0%.

Investors, as opposed to farmers, are making up an increasing share of farmland buyers, the Chicago Fed reported. Ultimately there is little worry right now about farmland values: while the Chicago Fed survey found 59% of bankers think farmland is currently overvalued, 76% expect those prices to be stable in the second quarter.

Investor ownership of farmland has been a regular topic for USDA Secretary Tom Vilsack, who has mentioned it in public remarks recently, particularly in relation to the heightened focus on Chinese ownership of U.S. farmland, which is still a very small percentage of all foreign-owned U.S. farmland. “What’s a greater risk, Chinese ownership of farmland or the fact that Wall Street investment banks own a third of the largest farm operations in the country?” Vilsack said in a hearing of the Senate’s Ag Appropriations Committee.

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