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WAITE MEMORIAL BOOK COLLECTION DEPT. OF AGRIC. AND APPLIED ECONOMICS 1111 4 FEDERAL RESERVE BANK OF CHICAGO ISSN 0002 - 1512 July 23, 1982 FARMLAND VALUES IN THE SEVENTH DISTRICT edged lower again in the second quarter. According to a Ltrin Number 1582 I were in the eastern half of the U.S. The sharpest decline was reported in Ohio. recent survey of more than 500 bankers in the Chicago Federal Reserve District, the value of good farmland Low farm earnings and high interest rates have declined 3.1 percent during the three months ending in June. This marks the third consecutive quarterly decline undermined land values and buyers' interest in purchasing land. Low farm earnings have resulted in a serious in District land values, an unprecedented occurrence in the 20-year history of the quarterly surveys. As a result, cash-flow squeeze for crop farmers, a loss of equity for some farmers, and reduced expectations of future District land values at the end of June, on average, were returns for those contemplating land purchases. The down 10 percent from the peak of last fall. Rural bankers expect the downturn to continue, as over half of them index of prices received by farmers for crops this June was down nearly a tenth from the year before. High forecast a decline in land values in the current quarter. interest rates have meant sharply higher debt-servicing Land values in four of the five District states declined costs on new land purchases and higher returns on alternative investments, such as interest-sensitive money during the second quarter (see map on page 2). Michigan was the exception, as bankers reported an increase market certificates. The impact of these factors on farm- of 3 percent. The upturn in Michigan land values is west have indicated that the land market is quite weak, surprising, but limited indications pointed to some energy-related developments there. Bankers in the Dis- with few buyers and few sales. land sales is very evident. Many observers in the Mid- trict portion of Indiana reported the sharpest decline, 7 The erosion in the value of farmland is particularly percent. In Iowa and the District portion of Illinois, land values declined 4 percent, while Wisconsin bankers significant to farmers who own the land they operate. Since, in the aggregate, real estate accounts for about indicated a decline of 1 percent. Relative to a year ago, the latest measures show that land values in four of the states are down by proportions ranging from 3 percent in Wisconsin to 19 percent in Indiana. In contrast, land values in Michigan are up 1 percent from a year ago. The sharp fall-off in land values in Indiana and to a somewhat three-fourths of the value of farm sector assets, any significant decline in farmland values reduces the equity of farmers. Since land often serves as collateral for loans, the deterioration in land values also reduces the borrowing power of farmers and increases the risk to lenders. In conjunction with a cash-flow squeeze, it aggravates the lesser extent in Illinois probably reflects the low returns from corn and soybean production. Crop earnings problems of highly leveraged farmers—those who have high debt levels relative to equity. These farmers may comprise a larger portion of overall earnings in those states. need to liquidate some farm assets to pay off debts or trim the size of operation. However, waning farmland The decline in land values apparently has been most severe in the Corn Belt, which includes Ohio, Indiana, Illinois, Iowa, and Missouri. According to the USDA, values and a thin market make restructuring more difficult. Highly leveraged farmers, however, are a small proportion of all farmers. Despite the loss in equity, most farmers still have considerable coverage of debts. which conducts a nationwide annual survey on changes in land values, the declines in values in those states Farmers' aggregate debt-to-equity ratio at the beginning of the year was .22—i.e., debt was slightly more than a *averaged 10 percent from February 1, 1981 to April 1, 1982. Land values for the U.S. overall were down 1 percent during the period, the first decline since 1953. Average values declined in 22 states, nearly all of which fifth of total farm equity. The near-term outlook for farmland values remains bleak. Farm earnings in the second half are not expected 2 Percent change in dollar value of "good" farmland Top. April 1, 1982 to July 1, 1982 Bottom: July 1, 1981 to July 1, 1982 April 1, 1982 July 1, 1981 to to July 1, 1982 July 1, 1982 —14 Illinois Indiana —7 —19 Iowa —4 —10 + 1 Wisconsin —1 —3 Seventh District —3 —10 Michigan Percent of banks reporting the current trend in farmland values is; Top: Up Center Stable Bottom: Down 0 48 52 0 42 58 III 0 56 44 IX XI 0 37 63 Down Up Stable Illinois 0 43 57 Indiana 0 36 64 Iowa 0 0 44 53 56 47 Wisconsin 1 60 39 Seventh District 0 46 54 Michigan 0 62 38 to increase enough to bolster the farmland market. Although cash receipts to livestock producers will be up considerably, receipts from crops may not improve. Expectations of higher corn and soybean prices have been dimmed by prospects for large corn and soybean harvests again this year. Price support programs may enhance prices somewhat, but other factors—including the low level of participation in acreage reduction programs and the uncertainties associated with future trade with the USSR—make a significant recovery in crop prices less likely. Also, interest rates are not expected to decline enough in the near term to help the farmland market. Bankers remain pessimistic about the outlook for farmland values. Fifty-four percent expect land values to decline this quarter, while the rest expect farmland" values to be stable. This is the second consecutive quarter that virtually none of the bankers have expected an increase in land values in the current quarter. 3 FOREIGN INVESTMENT IN U.S. AGRICULTURAL LAND rose last year. According to the USDA, foreign eigners, Maine led the list with 15 percent, followed by South Carolina and Georgia with 3 percent. sources acquired 2.6 million acres of U.S. land in 1981. In District states, the percentage of land owned by foreigners ranged from less than 0.1 percent in Wiscon- Despite the increase, foreign ownership still accounts for less than 1 percent of the U.S. land in farms and forests. sin to 0.5 percent in Indiana. Illinois had the largest Since February of 1979, the USDA has required for- amount of foreign-owned land, 144,000 acres. Since December 31,1980, foreign holdings of agricultural land eigners to report their holdings, acquisitions, and dispositions of U.S. agricultural land as part of the Agricultural Foreign Investment Disclosure Act of 1978. Foreign enti- increased by 11,500 acres in Illinois and by only 600 acres in Michigan. In other District states, foreign ownership of land declined in 1981. ties that must report include individuals, governments, and other entities such as partnerships. Even a domestic Of the U.S. agricultural land owned by foreigners, landowning entity, such as a U.S. corporation, must report if foreigners account for 5 percent or more of its ownership. 56 percent is forestland, another 13 percent is cropland, and 26 percent is pastureland. The remaining 5 percent is idle agricultural land or used for farmsteads. Thus, only Foreign interest must be reported if it involves at least one acre of U.S. agricultural land or if the annual gross sales of agricultural products from the land are more than $1,000. Foreign interest in idle U.S. land must also be reported if the land was used for agricultural purposes within the last five years. about 0.4 percent of the U.S. cropland base is owned by foreign interests, while nearly 2 percent of the U.S. forestland base is held by foreign investors. Interestingly, corporations—both domestic and foreign—own 85 percent of the foreign-held acreage. However, U.S. corporations, which are counted only if foreigners hold 5 percent or more of their ownership, The types of foreign interest that must be reported include ownership, purchase contracts, leaseholds of owned nearly two-thirds of all the acreage attributed to foreigners. Partnerships accounted for 8 percentpf the acreage while individuals held only 6 percent. The ten years or more, and noncontingent rights to future possession—which are, for example, ownership rights tions, and others. This means that direct foreign invest- that become possessory upon termination of a present estate. However, interests such as mortgages and other debt-securing devices are excluded. According to the latest report, foreigners held partial or whole interests in 12.7 million acres of U.S. agricultural land as of December 31,1981. That represented 0.94 percent of the 1.36 billion acres of agricultural land in this country. Total foreign land holdings in December were up 4.9 million acres from the year before. However, 2.3 million acres of that total represented acquisitions prior to 1981 that were reported in 1981. Another 2.1 million acres involved land held by a U.S. corporation that became 20 percent foreign-owned in 1981. Thus, it appears that the amount of U.S. agricultural land directly purchased by foreigners in 1981 was actually quite small. However, some upward adjustment in the estimate may be forthcoming since disclosure forms are sometimes submitted late. Foreign ownership was reported in every state except Rhode Island, but it was concentrated in the South and West. Foreign holdings in ten states—Maine, Georgia, California, Texas, New Mexico, Alabama, Oregon, Florida, South Carolina, and Washington— accounted for 65 percent of the acreage nationwide. In terms of the percentage of land that is owned by for- remaining 1 percent was held by estates, trusts, institument in U.S. agricultural land is really quite small, since the amount wholly owned by foreign individuals, partnerships, and corporations (excluding U.S. corporations with 5 percent or more foreign ownership) is only about 4 million acres. Foreign entities with interests in U.S. agricultural land represent a number of countries, but those from Canada, France, the United Kingdom, West Germany, and the Netherlands Antilles are most prevalent. Canadians account for nearly a third of the acreage while the French hold about a sixth. The country of origin, however, is not always clearly identified because of multiple layers of ownership. At the time of acquisition, the foreign entities planned to keep nearly all of their U.S. acreage in agricultural production. Also, fewer than half of the acquisitions resulted in changes in tenancy or rental arrangements. Research has been conducted in a few states to compare management of foreign-owned land to that of domestically owned, but it has not been conclusive in showing differences. Nevertheless, foreign ownership of agricultural land remains the focus of considerable attention. Thirty states have some kind of foreign landownership restrictions and eight of these have strengthened the restrictions or regulations in the last five years. Jeffrey L. Miller Selected agricultural economic developments Percent change from Subject 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) Agricultural trade Agricultural exports Agricultural imports Farm machinery salesP Farm tractors Combines Balers Value Prior period Year ago • Unit Latest period 1972-73=100 1972-73=100 June June 254 273 + 0.9 + 1.3 +10 +4 mil. dol. mil. dol. June June 21,898 4,885 + 2.7 +14.2 - 1 +8 mil. dol. mil. dol. June June 2,861 650 + 3.5 + 1.1 +5 +5 mil. dol. mil. dol. June June 46,316 11,072 + 0.9 + 0.7 +15 +15 mil. dol. mil. dol. June June 552 114 + 7.0 - 6.3 -33 -48 percent percent percent percent percent 2nd Quarter 2nd Quarter 7/15-7/21 7/15-7-21 7/15-7/21 17.25 16.74 11.06 12.14 13.36 + 0.8 + 0.5 -12.9 -14.3 - 5.8 +5 -27 -36 - 2 mil. dol. mil. dol. May May 3,403 1,328 - 2.3 +11.7 - 5 -13 units units units June June June 6,816 1,092 1,777 +16.9 +82.9 +164.8 -16 -39 -33 +1 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. AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. Box 834 Chicago, Illinois 60690 FEDERAL RESERVE RANK OF (HI( A(.0 r 111441 tALL4‘1,CALf f IRSI-CLASS MAIL U.S. POSTAGE PAID Chicago. II. Permit No. 1942 Tel no. (312) 322-5112 HEAD•DEPT.OF AGRIC.ECON. AGL INSTITUTE OF AGRICULTURE UNIVERSITY OF MINNESOTA ST.PAUL,MINNESOTA 55101 •