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FEDERAL RESERVE BANK OF CHICAGO ISSN 0002 - 1512 I Number 1608 I July 22, 1983 WAITE MEMORIAC BOOK COLLECTION DEPT. OF AGRIC. AND APPLIED ECONOMICS DISTRICT FARMLAND VALUES, although down from year-ago levels, have been edging higher this year. Our latest survey of nearly 600 District agricultural bankers shows that the value of good farmland, on average, rose about 1.6 percent in the three months ending with June. This marks the second consecutive survey that has registered a modest quarterly upturn in District land values. Because of sharp declines in the preceding five quarters, however, District farmland values remain 5 percent below the year-earlier level and 14 percent below the peak reached in the summer of 1981. As was the case for the first quarter, bankers from all five District states reported rising land values for the Amk second quarter. Bankers from the District portion of Illinois again reported the largest increase, slightly more • than 2.5 percent. For the other four states, the quarterly increases ranged from 1.0 percent in Indiana to nearly 1.5 percent in Wisconsin. Relative to a year ago, land prices are still down in all five District states, ranging from about 1 percent in Wisconsin to nearly 7 percent in Indiana and Iowa. Much of the first-half turnaround in District farmland values no doubt reflects the perceived implications of the PIK program. The generosity of the PIK program attracted widespread participation among farmers. The high level of participation buoyed hopes that the imbalance in grain markets from two years of record crop production and two to three years of declining exports could be corrected. This plus the emerging "tightness" that developed in free market supplies of old crop corn—through farmers heavy reliance on CCC loans, entry into the reserve program, and the encumbrances that evolved with PIK entitlements—considerably enhanced crop prices beyond what would otherwise have been the case. While many farmers are still confronting a severe financial squeeze, the developments through the jaspring of 1983 produced a mood of optimism that suggested the worst was over for the stress on farm earnings. This, in turn, added some upward momentum that ended the slide in farmland values. District farmland values are edging upward from late 1982 trough Index, January 1973=100 500 — 400 300 200 100 0 traltilliillittlisiltirloillii,1111 11 Ail I 1973 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 Lower farm mortgage rates have also given support to the upward momentum in farmland values. Farm mortgage loan rates charged by District agricultural banks at midyear averaged a little under 131/4 percent, down from 14% percent at the end of 1982 and down from 163/4 percent a year ago. Rates charged by Federal Land Banks that serve farmers in District states now range from 111/4 to 12 percent with new loan fees ranging from 0 to 4 percent. A year ago, FLB loan rates ranged from 121/2 to 13 percent with new loan fees ranging from 3 to 5 percent. While the land market has been spurred by a modest upward momentum in values and lower interest rates, the volume of farm real estate transactions is still apparently quite limited. Although conditions seem to vary considerably by area, a number of bankers commented about the continuing low volume of transactions. A similar conclusion can be drawn from the low volume of new lending by commercial farm mortgage lenders. Through May of this year, new money loaned by FLBs lagged the pace of the preceding year by 43 2 Percent change in dollar value of "good" farmland Top: April 1, 1983 to July 1, 1983 Bottom: July 1, 1982 to July 1, 1983 I II 0 —5 +1 —7 +2 -4 April 1, 1983 to July 1, 1983 July 1, 1982 to July 1, 1983 Illinois +3 —4 Indiana +1 —7 Iowa +1 —7 Michigan +1 —5 Wisconsin +1 —1 Seventh District +2 —5 Percent of banks reporting the current trend in farmland values is; Top: Center: Up Stable Bottom: Down 20 78 IV II 13 70 17 8 78 14 2 III 0 84 fj V 23 68 9 13 83 0 VIII I 16 Up Stable Illinois 25 69 6 Indiana 19 78 Iowa 15 9 73 81 3 12 11 2 89 9 16 76 8 Michigan Wisconsin Seventh District Down 78 0 3 For the next few months, many observers believe farmland values will be fairly stable. Of the bankers percent and the pace of two years 'ago by 59 percent. • FLBs, long the dominant farm mortgage lender, hold 43 percent of the outstanding farm real estate debt and responding to the most recent survey, 76 percent extend about 37 percent of the debt funds used annually in credit-finance farm real estate transactions. In terms thought that farmland values in the current quarter would remain steady. An additional 16 percent thought of outstanding farm real estate debt, the share held by land values would rise this quarter, while 8 percent fore- FLBs far outranks the 29 percent share held by individuals and others. In terms of debt funds extended in credit- saw declining land values. On balance, this distribution of bankers' views is slightly less hopeful than in April financed farm real estate transfers, the share from FLBs when 23 percent thought land values would rise in the usually ranks a close second to the -share provided second quarter and only 11 percent foresaw declines. through seller financing. The shift in bankers' attitudes seems to mirror a waning in the initial optimism about how quickly the In contrast to the continuing downturn in FLB lending, it appears that the long downturn in farm mortgage lending by life insurance companies may have ended. Prior to the beginning of this year, farm mortgages surplus production in U.S. agriculture could be drawn into balance with the decline in utilization. Unless recent weather problems lead to extensive crop dam- acquired by life insurance companies had fallen about age, another year of large acreage cuts will be needed. 80 percent over a three and one-half year period. But in Initial suggestions indicate that program provisions in the first quarter of 1983, their acquisitions were up 6.5 percent from the year before. Moreover, in both the 1984 will be less attractive to farmers and therefore may fourth quarter of last year and the first quarter of this discussions regarding the possibility of freezing target prices and lowering loan support rates for 1984 price . not attract as much participation. Moreover, current year, the dollar volume of new farm mortgage commitments made by life insurance companies exceeded the support programs for grain farmers—while probably of merit for the long-run benefit of agriculture—have cast some doubts about the strength of the short-run recov- extremely low year-earlier levels by about 70 percent. The jump in commitments suggests that farm mortgage acquisitions by life insurance companies probably con- ery in farm earnings. Additional doubts about the short- tinued to register year-to-year gains in the second quarter. A few years ago, life insurance companies provided run recovery in farm earnings have been triggered by the evidence that hog production has rebounded to an about 13 percent of the debt funds used annually in unexpected degree. As a result, livestock prices have credit-financed farm real estate transfers. But following declined, which, coupled with recent feed prices, has the prolonged slide, their share dropped to 4 percent. squeezed the operating margins of livestock producers. Also, earnings prospects for dairy farmers have waned with the imposition of producer assessments and the growing likelihood that Congress and the Administration will scale-down the costly dairy price support program. Share of debt extended in debt-financed farmland transfers year-ending Mar. 1 1977 1982 (percent) (percent) With these developments moderating earlier opti- 4 other insurance companies commercial banks FederakLand Banks • mism, it seems likely that farmland values will hold close to current levels in the short-term. There seems to be little on the horizon that would support prospects for substantial strength in farmland values. But at the same time, it does not seem likely that conditions will revert to the sharp declines in land values that occurred in much of 1981 and all of 1982. Gary L. Benjamin 4 Selected agricultural economic developments Percent change from Subject Unit Latest period 1972-73=100 1972-73=100 June June mil. dol. mil. dol. Value Prior period Year ago 281 290 + 0.5 + 1.8 +10 +6 May 19,813 N.A. + 1.0 N.A. -7 N.A. mil. dol. mil. dol. May 2,507 N.A. -12.4 N.A. - 9 N.A. mil. dol. mil. dol. May 47,710 N.A. + 0.2 N.A. +4 N.A. mil. dol. mil. dol. May 333 N.A. - 5.0 N.A. -36 N.A. percent percent percent percent percent 2nd Quarter 2nd Quarter 7/14-7/20 7/14-7/20 7/14-7/20 13.58 13.32 9.11 9.43 11.37 - 3.0 - 3.9 + 3.1 + 3.2 + 5.1 -21 -20 -18 -22 -15 Agricultural trade Agricultural exports Agricultural imports mil. dol. mil. dol. May May 2,680 1,495 -10.1 + 1.8 -21 +12 Farm machinery salesP Farm tractors Combines Balers units units units June June June 14,740 506 2,021 +19.0 +40.9 +165.6 +28 -54 +11 Farm finance Total deposits at agricultural bankst Total loans at agricultural bankst Production credit associations Loans outstanding United States Seventh District states Loans made United States Seventh District states Federal land banks Loans outstanding United States Seventh District states New money loaned United States Seventh District states Interest rates Feeder cattle loanstt Farm real estate loanstt Three-month Treasury bills Federal funds rate Government bonds (long- term) • • tMember banks in Seventh District having a large proportion of agricultural loans in towns of less than 15,000 population. ttAverage of rates reported by District agricultural banks at beginning and end of quarter. PPreliminary. N.A. - Not available. AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. Box 834 Chicago, Illinois 60690 Tel. no. (312) 322-5112 FIRST-CLASS MAIL U.S. POSTAGE PAID Chicago. II. Permit No. 1942 PS001 HERDHDEPTOF•nRIC.:ECOR INSTITUTE. OF FILIICULTURE UNWESITY. OF MINNESOTA 57.PfltiL1MN .
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