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The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1933	

AgLetter

August 2006

FARMLAND VALUES AND CREDIT CONDITIONS
CONFERENCE ANNOUNCEMENT

Summary
Increases slowed in the second quarter of 2006 for the
value of “good” agricultural land in the Seventh Federal
Reserve District, while credit conditions generally declined. From April 1, 2006, to June 30, 2006, farmland
values rose 1 percent, on average, for the District, based
on a survey of 235 agricultural bankers. The year-overyear increase as of July 1 was 9 percent, below the annual
increase for the second quarter of 2005. Almost threequarters of the responding bankers expected farmland
values to be unchanged in the third quarter, although
21 percent thought more increases are forthcoming.

Globally Competitive Agriculture and the Midwest
On September 29, 2006, the Federal Reserve Bank of Chicago
and the Chicago Council on Foreign Relations will hold a joint
conference on the linkages between global competition in agriculture and the Midwest. Please check the conference website
at www.chicagofed.org under “Upcoming Events” for more
details and the agenda.

for the ninth time in a row. Loan-to-deposit ratios reached
a new high for the survey of 78 percent, as of July 1, 2006.

Farmland values
Gains in farmland values were smaller in the second
quarter of 2006. The average quarterly increase for good
agricultural land in the District was 1 percent from the
first quarter of 2006 (see table and map). Iowa exhibited
the strongest quarterly growth in land values at 3 percent,
while Illinois and Indiana were at the District average,
and Michigan and Wisconsin pulled down the District
average. The year-over-year gain of 9 percent for the
District indicated a slowing from 12 percent a year ago,
although it matched last quarter’s gain. In addition, the
state gains were closer together than they were in the previous quarter. Michigan and Wisconsin had the biggest

Once again, credit conditions drifted down compared
with a year ago. Though a smaller percentage of agricultural loans were classified by respondents as having “major” or “severe” repayment problems compared with those
six months ago, the rate of loan repayment fell from the
second quarter of 2005. Non-real-estate loan demand from
April through June grew from a year ago, while the availability of funds remained about the same. Renewals and
extensions of loans were up relative to the second quarter of 2005. A larger percentage of banks required higher
amounts of collateral than in the same period the previous year. Interest rates on farm loans rose in the quarter

Percent change in dollar value of “good” farmland
Top:
April 1, 2006 to July 1, 2006
Bottom: July 1, 2005 to July 1, 2006
	
	
	
Illinois	
Indiana	
Iowa	
Michigan 	
Wisconsin	
Seventh District	

April 1, 2006	
to	
July 1, 2006	
+1	
+1	
+3	
*	
0	
+1	

July 1, 2005
to
July 1, 2006
+9
+6
+8
*
+13
+9

VI
–4
+13
I
+3
+8

II
+5
+10
+3
III +11

+2
+11

*
VII
+5
+13

IV

XIV
*

X
–1
+7 VIII

V
0
+4

*Insufficient response.

XII

*

IX
+3
+7

XV

XI
+1
+10

XVI

+7
+14

–3
+2

values will continue, since cash rental rates are unlikely
to rise fast enough to bring the P/E ratio back toward the
norm. Certainly, a continued slowing in land value growth
would fit the survey results on expected land values and
the history of P/E ratios for the District.

1. District price-to-earnings ratio
1981=1.0
1.4

1.2

1.0

0.8

0.6
1981

’86

’91

’96

2001

’06

Note: Derived from indexes based on Federal Reserve Bank of Chicago's Land
Value and Credit Condition Surveys.

increases from a year ago; the increases in Indiana and
Iowa trailed those of the other states.
Growth in farmland values benefited from the momentum of double-digit increases for the District the last
two years. The District continued to see demand for residential and recreational acreages, as well as by nonfarm
investors. Yet, given this year’s slowdown in the housing
industry, the demand for additional farmland by developers seemed to slow, as indicated by reports of abandoned deals. So, location and other characteristics have
become even more important factors in farmland values
as increases have become more mixed.
Based on survey responses, gains in the third quarter of 2006 should continue to slow, with 21 percent of
respondents expecting increases in farmland values
between July and September and 6 percent forecasting
decreases. Most of those surveyed anticipated farmland
values to remain stable in the third quarter. Responses
by state reflected the District trend, although 30 percent
of Wisconsin respondents expected higher land values.
The District price-to-earnings (P/E) ratio for farmland is another indicator that the stage has been set for a
slowdown in farmland value growth. From an asset valuation model, the present price of an asset should reflect
current profitability and expectations for future earnings.
Cash rental rates represent the earnings potential of farmland. The P/E ratio for farmland can then be constructed
as the ratio of an average farmland value per acre and the
cash rental rate per acre. Over the past few years, the
District P/E ratio has increased the most since the 1980s
(see chart 1), consistent with the evidence of a surge in
nonfarm investment. With farmland values seeming to
have increased faster than earnings potential, one could
conclude that declines in the rate of increase in land

Credit conditions
Given higher operating costs (especially for fuel and
fertilizer) and losses from drought in parts of the District,
tighter cash flows for agricultural operations have led to
poorer credit conditions in general. In response to cash
flow needs, demand for non-real-estate agricultural loans
was higher than a year ago for the tenth quarter in a row.
With 35 percent of banks reporting increased demand
compared with the second quarter last year and 20 percent decreased demand, the index of non-real-estate agricultural loan demand eased to 115, after an even bigger
jump in the first quarter of 2006 when more planting
costs were likely incurred.
There was another dip in repayment rates for nonreal-estate farm loans from April to June relative to the
previous year. The index of loan repayment rates was 85,
with 7 percent of the responding bankers noting higher
rates of loan repayment and 22 percent lower rates. On
the other hand, only 3 percent of the respondents’ farm
loan volume was classified as having major or severe repayment problems, matching the percentage of a year
ago and slightly less than six months ago.
Higher levels of renewals and extensions of non-realestate agricultural loans relative to those from the second
quarter of 2005 also indicated credit concerns, with 20
percent of respondents reporting an increase and 6 percent
a decrease. Relative to the previous year, the amount of
collateral required for loans was higher at 17 percent of the
reporting banks and lower at only 2 percent. Fund availability was essentially flat for the quarter versus a year ago,
given an index value of 101. The average loan-to-deposit

2. Quarterly District farm loan interest rates
percent
13

11

Farm
operating

9
Farm real
estate

7

5
1990

’92

’94

’96

’98

2000

’02

’04

’06

Credit conditions at Seventh District agricultural banks
		
		
		
		

	
	
	
	
	
Interest rates on farm loans
						
Loan	
Funds	
Loan	
Average loan-to-	
Operating	
Feeder	
Real
demand	
availability	
repayment rates	
deposit ratio	
loans1	
cattle1	
estate1

		
(index) 2	
(index) 2	
(index) 2	
(percent)	
(percent)	
(percent)	
								
2003
	 Jan–Mar	
109	
130	
79	
72.4	
6.61	
6.75	
	 Apr–June	
99	
138	
84	
72.7	
6.43	
6.52	
	 July–Sept	
95	
129	
86	
72.9	
6.41	
6.47	
	 Oct–Dec	
97	
127	
104	
71.8	
6.26	
6.35	

(percent)	

6.36
6.04
6.12
6.05

2004
	 Jan–Mar	
	 Apr–June	
	 July–Sept	
	 Oct–Dec	

116	
101	
109	
109	

131	
117	
111	
121	

128	
118	
112	
127	

73.2	
73.7	
74.5	
74.1	

6.22	
6.39	
6.57	
6.81	

6.28	
6.46	
6.61	
6.80	

5.87
6.23
6.28
6.39

2005
	 Jan–Mar	
	 Apr–June	
	 July–Sept	
	 Oct–Dec	

117	
119	
115	
120	

112	
101	
97	
110	

116	
103	
87	
90	

74.4	
76.3	
76.9	
75.8	

7.07	
7.33	
7.68	
8.02	

7.08	
7.30	
7.65	
7.95	

6.63
6.74
7.02
7.25

2006
	 Jan–Mar	
	 Apr–June	

131	
115	

102	
101	

87	
85	

76.7	
78.0	

8.30	
8.76	

8.27	
8.66	

7.48		
7.85

At end of period.
Bankers responded to each item by indicating whether conditions during the current quarter were higher, lower, or the same as in the year-earlier period. The index numbers are computed by
subtracting the percent of bankers that responded “lower” from the percent that responded “higher” and adding 100.

1
2

ratio in the District was 78 percent, a new high for the survey, though 3 percent below the ratio desired by the banks.
Agricultural interest rates rose for the ninth consecutive quarter (see chart 2). As of July 1, the District average for interest rates on new operating loans was 8.76
percent, the highest average in five years. Interest rates
for farm mortgages climbed to 7.85 percent, still over one
percent lower than the last peak of six years ago.
For the first half of 2006, the amount of farm loans
generated was higher than normal for banks and the Farm
Credit System (FCS), though a majority reported the same
volumes as normal. With 30 percent more banks having
higher versus lower than normal operating loan volume,
the FCS still captured a larger share of the market, since
37 percent more banks reported FCS volumes increased
rather than decreased. This trend was even more pronounced for farm mortgages, with just 7 percent more
banks experiencing higher rather than lower volumes,
whereas 42 percent more FCS lenders did so. Merchants,
dealers, and other input suppliers also boosted their loan
production above normal, as noted by 26 percent more of
the respondents. The volume of loans provided by life
insurance companies edged down again, with higher
amounts of loans reported by 7 percent of responding
banks and lower amounts by 15 percent.

Looking forward
For the third quarter of 2006, 29 percent of the respondents
anticipated farm non-real-estate loan volume to be higher

than in the third quarter of 2005, while 16 percent anticipated lower volume. Operating loans, Farm Service Agency
guaranteed loans, and grain storage construction loans
were expected to have higher volumes, whereas feeder
cattle, dairy, and farm machinery loans were expected to
have lower volumes. In Indiana and Iowa, 20 percent and
26 percent more of the bankers, respectively, expected
higher rather than lower volumes of grain storage construction loans, probably due to forecasts of increased
profits from storage of corn. Bankers also predicted a decline in real estate loan volume (15 percent higher versus
20 percent lower) from July through September of 2006.
David B. Oppedahl, business economist
AgLetter (ISSN 1080-8639) is published quarterly by the
Research Department of the Federal Reserve Bank of Chicago.
It is prepared by David B. Oppedahl, business economist, and
members of the Bank’s Research Department. The information
used in the preparation of this publication is obtained from
sources considered reliable, but its use does not constitute an
endorsement of its accuracy or intent by the Federal Reserve
Bank of Chicago.
© 2006 Federal Reserve Bank of Chicago 	
AgLetter articles may be reproduced in whole or in part,
provided the articles are not reproduced or distributed for
commercial gain and provided the source is appropriately
credited. Prior written permission must be obtained for any
other reproduction, distribution, republication, or creation of
derivative works of AgLetter articles. To request permission,
please contact Helen Koshy, senior editor, at 312-322-5830
or email Helen.Koshy@chi.frb.org. AgLetter and other Bank
publications are available on the Bank’s website at
www.chicagofed.org.

Selected agricultural economic indicators
	
	
	
	

Percent change from
Latest		
period	
Value	

Prior	
period	

Year	
ago	

Two years
ago

Prices received by farmers (index, 1990–92=100)	
	 Crops (index, 1990–92=100)	
	 	 Corn ($ per bu.)	
	 	 Hay ($ per ton)	
	 	 Soybeans ($ per bu.)	
	 	 Wheat ($ per bu.)	
	 Livestock and products (index, 1990–92=100)	
	 	 Barrow and gilts ($ per cwt.)	
	 	 Steers and heifers ($ per cwt.)	
	 	 Milk ($ per cwt.)	
	 	 Eggs (¢ per doz.)	

July	
July	
July	
July	
July	
July	
July	
July	
July	
July	
July	

117	
123	
2.20	
107.00	
5.60	
4.09	
110	
50.30	
90.4	
11.9	
45.6	

0.0	
–  2.4	
2.8	
–  1.8	
–  0.2	
2.0	
0.0	
–  8.0	
2.1	
0.0	
–19.0	

1	
7	
4	
7	
–  16	
28	
–6	
0	
2	
–  20	
–  13	

–  6	
2
–  12	
18	
–  34
21	
–  14	
–  13	
–  1	
–  26	
–  22

Consumer prices (index, 1982–84=100)	
	 Food	

July	
July	

204	
195	

0.3	
0.3	

4	
2	

7	
4

June 1	
June 1	
June 1	
June	
June	
July	

4,363	
990	
568	
2.43	
1.66	
13.9	

N.A.	
N.A.	
N.A.	
5.7	
–  3.4	
–  0.7	

1	
42	
5	
9	
–  3	
1	

47	
141
4	
9	
–  1
6

Agricultural exports (mil. dol.)	
	 Corn (mil. bu.)	
	 Soybeans (mil. bu.)	
	 Wheat (mil. bu.)	

June 	
June	
June 	
May	

5,606	
191	
39	
75	

–  4.0	
–  9.1	
–  16.1	
4.8	

15	
21	
13	
–  3	

27
37	
85
–  21

Farm machinery (units)
	 Tractors, over 40 HP	
	 	 40 to 100 HP	
	 	 100 HP or more	
	 Combines	

July	
July	
July	
July	

8,247	
7,264	
1,163	
661	

–  13.8	
–  13.3	
–  17.0	
4.4	

–  9	
–  5	
–  27	
–  11	

–  9
–  4
–  29
–  1

Production or stocks
	 Corn stocks (mil. bu.)	
	 Soybean stocks (mil. bu.)	
	 Wheat stocks (mil. bu.)	
	 Beef production (bil. lb.)	
	 Pork production (bil. lb.)	
	 Milk production (bil. lb.)*	

	
	
	

N.A. Not applicable
*23 selected states.
Source: Data from the U.S. Department of Agriculture, U.S. Bureau of Labor Statistics, and the Association of Equipment Manufacturers.