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The Agricultural Newsletter from the Federal Reserve Bank of Chicago AgLetter Number 1965 FARMLAND VALUES AND CREDIT CONDITIONS August 2014 CONFERENCE ANNOUNCEMENT Farm Income’s Impact on the Midwest Summary For the second quarter of 2014, “good” agricultural land values in the Seventh Federal Reserve District were 3 percent higher than a year ago. Moreover, farmland values increased 2 percent from the first quarter to the second quarter of 2014, according to a survey of 230 agricultural bankers. Farmland values were partly buoyed by a spring rally in corn and soybean prices, which occurred before these crop prices started falling again in May. Only 2 percent of survey respondents anticipated farmland values to rise during the third quarter of 2014, while 30 percent predicted them to fall and 68 percent expected them to be stable. On November 17, 2014, the Federal Reserve Bank of Chicago will hold a conference to examine the role of farm income in the Midwest economy. While farm income has long been an important driver of midwestern economic activity, its influence had been waning until the boom in crop prices of the past decade. For more details and to register, go to www.chicagofed.org/webpages/events/2014/agricultureconference.cfm. about 10 percentage points below the average level desired by survey respondents. The availability of funds for lending by agricultural banks was up relative to a year ago. Lastly, interest rates on farm operating and feeder cattle loans moved lower, while those on farm real estate loans were essentially unchanged. The District’s agricultural credit conditions weakened somewhat in the second quarter of 2014 relative to a year ago. Repayment rates for non-real-estate farm loans were lower than a year earlier, even as 93 percent of the survey respondents reported their agricultural loan portfolios had no significant repayment problems. Renewals and extensions of non-real-estate farm loans rose from the level of a year earlier. The responding bankers perceived that demand for non-real-estate loans in the April through June period of 2014 was higher than that in the same period last year. For the second quarter of 2014, the District’s average loan-to-deposit ratio was 67.3 percent— Farmland values District agricultural land values stayed higher than their level of a year ago—a pattern prevailing since late 2009; the 3 percent year-over-year increase in farmland values for the second quarter of 2014 was slightly larger than that for the previous quarter (1 percent). Yet, these increases pale in comparison with the double-digit gains experienced in the past few years (see chart 1 on next page). Percent change in dollar value of “good” farmland Top: April 1, 2014 to July 1, 2014 Bottom: July 1, 2013 to July 1, 2014 April 1, 2014 July 1, 2013 to to July 1, 2014 July 1, 2014 Illinois + 3 +3 Indiana – 1 0 Iowa + 1 – 1 Michigan * * Wisconsin +6 + 1 Seventh District +2 +3 VI +6 –3 I 0 – 2 II +4 +2 – 3 III – 4 0 +3 * VII +8 +3 IV +3 +8 VIII V +2 0 *Insufficient response. XII XIV * X * IX +3 +2 XV XI +3 +3 XVI * * 1. Year-over-year changes in Seventh District farmland values, by quarter percent 30 25 20 15 10 5 0 −5 2002 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 After experiencing a quarterly decline in the previous quarter, “good” farmland values for the District rose 2 percent in the second quarter of 2014 relative to the first quarter, suggesting persistent strength in farmland markets (see table and map on front page). Only Iowa exhibited a year-over-year decline in agricultural land values, and only Indiana had a quarterly decrease. Moreover, profitability in the livestock sector served to counteract some of the weakness in the crop sector. In particular, survey respondents noted that the improved bottom line for dairy operations corresponded with a boost in demand for farmland in some areas. For instance, the surge in dairy farming profits was consistent with Wisconsin’s 6 percent jump in quarterly farmland values. Primary crop prices resumed their slide after a spring rally that supported farmland values in the second quarter of 2014. According to the U.S. Department of Agriculture (USDA), corn prices averaged $4.64 per bushel in the second quarter of 2014—up 4.7 percent from the first quarter, but down 34 percent from a year ago. At $14.37 per bushel in the second quarter of 2014, soybean prices were up 8.3 percent from the previous quarter, but down 2.9 percent from a year ago. After concerns about spring planting delays and drought in parts of the Corn Belt were alleviated, downward pressures on corn and soybean prices reasserted themselves. In August of this year, the USDA estimated that the 2014 U.S. harvest of corn for grain would exceed the record set in 2013 by 0.8 percent and the harvest of soybeans would break a record as well (it was projected to be 16 percent larger than the 2013 harvest). These bumper harvests would boost crop stocks to levels not seen in nearly a decade. Given that plentiful supplies of crops are expected, the USDA estimated price intervals of $3.55 to $4.25 per bushel for corn and $9.35 to $11.35 per bushel for soybeans for the 2014–15 crop year. When estimated with the midpoints of these price ranges, the projected values of the U.S. corn and soybean harvests in 2014 are 12 percent and 7.6 percent lower than the 2013 harvests, respectively. Of course, these figures mask the reality that some farmers will experience higher-than-average yields and use smart marketing plans for their crops, thereby seeing less of a negative impact on their cash flows from the downturn in crop prices. Credit conditions Mixed agricultural credit conditions in the second quarter of 2014 reflected the general downturn in crop prices as well. Repayment rates for non-real-estate farm loans relative to a year ago deteriorated again during the second quarter of 2014. The index of loan repayment rates slipped to 93, with 8 percent of responding bankers noting higher rates of loan repayment than a year ago and 15 percent noting lower rates. Agricultural loans with “major” or “severe” repayment problems still made up less than 2 percent of the District loan portfolio, but there was evidence of a small shift of repayment problems from Wisconsin to District states that produce more corn and soybeans. Also, 13 percent of the survey respondents observed more loan renewals and extensions over the April through June period of 2014 compared with the same period last year, while 6 percent observed fewer of them. Collateral requirements for loans tightened somewhat in the second quarter of 2014 relative to the second quarter of the previous year, as 7 percent of the survey respondents reported that their banks required more collateral and less than 1 percent reported that their banks required less. On the whole, banks had more funds available to lend in the second quarter of 2014 than a year ago. With 26 percent of responding bankers reporting their banks had more funds available to lend and 3 percent reporting their banks had less, the index of funds availability was 123 for the second quarter of 2014. Interest rates on feeder cattle and farm operating loans moved down in the second quarter of 2014. Farm real estate loan rates were essentially unchanged (see chart 2). As of July 1, 2014, the District average for interest rates on new feeder cattle loans stood at 4.98 percent (it was below 5 percent for the first time in the survey’s history). 2. Quarterly Seventh District farm loan interest rates percent 13 11 Farm operating 9 7 Farm real estate 5 3 1992 ’94 ’96 ’98 2000 ’02 ’04 ’06 ’08 ’10 ’12 ’14 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 loansa cattlea estatea (index)b (index)b (index)b (percent) (percent) (percent) (percent) 2012 Jan–Mar Apr–June July–Sept Oct–Dec 72 69 81 96 163 164 147 151 154 139 128 135 66.5 68.1 67.5 67.2 5.34 5.27 5.21 5.03 5.54 5.41 5.37 5.24 5.08 4.94 4.86 4.70 2013 Jan–Mar Apr–June July–Sept Oct–Dec 67 87 91 120 161 142 128 121 143 129 115 91 63.7 64.6 66.9 67.3 4.91 4.94 4.94 4.99 5.12 5.16 5.14 5.10 4.60 4.65 4.68 4.94 2014 Jan–Mar Apr–June 114 110 128 123 96 93 67.0 67.3 4.93 4.86 5.07 4.98 4.66 4.67 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 percentage of bankers who responded “lower” from the percentage who responded “higher” and adding 100. Note: Historical data on Seventh District agricultural credit conditions are available for download from the AgLetter webpage, www.chicagofed.org/webpages/publications/agletter/index.cfm. a b In addition, the District averages for interest rates on new farm operating and real estate loans were 4.86 percent and 4.67 percent, respectively; these average rates were about the same as those of a year ago. During the second quarter of 2014, demand for non-real-estate loans was higher than a year earlier. With 30 percent of survey respondents reporting higher demand for non-real-estate loans compared with a year ago and 20 percent reporting lower demand, the index of loan demand was 110 for the second quarter of 2014. In the first six months of 2014, the amount of farm operating loans generated by banks was greater than the historically normal level, whereas the amount of farm mortgages was lower than normal (except in Wisconsin). These trends in farm loan originations were a reversal from those seen a year ago. Heightened competition among agricultural lenders was a concern for District bankers. A focus of this concern was the difficulty for banks in matching the loan offers by Farm Credit System (FCS) lenders to borrowers with high credit quality. According to responding bankers, over the first six months of 2014, the amounts of farm operating loans and mortgages originated by FCS institutions were higher than typical. Similarly, in the January through June period of 2014, merchants, dealers, and other input suppliers lent more than usual to farmers; in contrast, life insurance companies lent less than usual. Looking forward Given the downward trends in crop prices, the year-overyear and quarterly increases in District farmland values for the second quarter of 2014 may turn out to have been blips. Indeed, farmland values may have already plateaued. Certainly, survey respondents tended to take this view: Only 2 percent of responding bankers expected farmland values to increase in the third quarter of 2014, while 30 percent anticipated them to decrease and 68 percent forecasted them to be stable. As a whole, the survey results indicated weakness in agricultural land values in the coming quarters. Responding bankers expected non-real-estate agricultural loan volumes—especially those for operating loans (and even for feeder cattle loans)—to increase in the third quarter of 2014 relative to the same quarter of 2013. Volumes for farm machinery and grain storage construction loans were forecasted to fall in the July through September period of 2014 relative to their year-ago levels. Survey respondents generally anticipated farm real estate loan volumes to be lower in the third quarter of 2014 than a year earlier. However, responding bankers from Wisconsin expected higher farm real estate and dairy loan volumes in the third quarter of 2014 relative to a year ago, largely because of anticipated profits from dairy farming. David B. Oppedahl, senior business economist AgLetter (ISSN 1080-8639) is published quarterly by the Economic Research Department of the Federal Reserve Bank of Chicago. It is prepared by David B. Oppedahl, senior business economist, and members of the Bank’s Economic 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 or the Federal Reserve System. © 2014 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 at www.chicagofed.org. SELECTED AGRICULTURAL ECONOMIC INDICATORS Percent change from Latest Prior Year Two years period Value period ago ago Prices received by farmers (index, 2011=100) Crops (index, 2011=100) Corn ($ per bu.) Hay ($ per ton) Soybeans ($ per bu.) Wheat ($ per bu.) Livestock and products (index, 2011=100) Barrows & gilts ($ per cwt.) Steers & heifers ($ per cwt.) Milk ($ per cwt.) Eggs ($ per doz.) July July July July July July July July July July July 108 3.6 1 4 – 90 – 8.2 – 16 – 17 3.80 – 15.4 – 44 – 47 192 2.5 1 7 – 12.70 – 11.8 – 17 – 18 6.10 – 6.0 – 12 – 23 133 3.1 24 34 93.20 9.6 23 27 156.00 5.4 29 34 23.40 0.9 23 38 1.25 14.7 20 29 Consumer prices (index, 1982–84=100) Food June June 238 0.3 2 4 243 0.1 2 4 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.)* Agricultural exports ($ mil.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) June 1 3,854 N.A. 39 22 June 1 405 N.A. – 7 – 39 June 1 590 N.A. – 18 – 21 June 2.07 – 0.1 – 4 – 8 June 1.73 – 6.8 3 – 1 June 16.2 4.1 2 5 – June June June June 11,036 189 22 77 – 6.3 – 9.5 – 31.4 – 18.1 12 315 14 – 19 9 64 – 59 – 13 Farm machinery (units) Tractors, 40 HP or more June 8,503 N.A. – 7 4 40 to 100 HP June 5,884 N.A. 1 7 100 HP or more June 2,619 N.A. – 20 – 1 Combines June 705 N.A. – 24 – 1 N.A. Not applicable. *23 selected states. Sources: Author’s calculations based on data from the U.S. Department of Agriculture, U.S. Bureau of Labor Statistics, and the Association of Equipment Manufacturers.
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