The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1916 May 2002 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS gain since the first quarter of 1996. It was also the first quarter in two years where each of the five states recorded increased farmland values. The District’s year-over-year gain of about 6 percent in the latest period was up about 1 percentage point from the quarterly average in 2001. Summary Farmland prices in the Seventh Federal Reserve District increased a little more rapidly in the first quarter of 2002 than has been the case since mid-1998. Based on the Chicago Fed’s end-of-first quarter Land Value and Credit Conditions Survey, prices for “good” farmland rose, on average, a little less than 3 percent between January 1, 2002, and April 1, 2002. In addition, data from 381 agricultural bankers indicated that farmland prices rose nearly 6 percent, on average, relative to a year ago. By comparison, the end-of-first-quarter 2001 Survey reported farmland prices were up about 4 percent from a year earlier. District-wide, 30 percent of the bankers observed that the amount of farmland up for sale was higher than a year ago. A year ago, 34 percent of respondents noted an increase in the amount of land for sale. Demand for farmland was up, as 36 percent of the bankers noted increased demand as compared with the survey a year ago when 24 percent reported higher demand. Respondents continued to report strong demand for farmland to be converted into non-farm purposes. Bankers also noted that demand for land by other farmers increasingly came from IRS Section 1031 tax-deferred exchanges. A “1031 exchange” allows a farmer with “high-value” land in an “urban fringe” area favorable to non-farm development to sell such land and purchase a more remote parcel. The key to these transactions is the tax deferral on capital gains derived from the sale of urban fringe farms. Some bankers observed that this form of transaction was a significant factor in bidding up farmland prices in outlying areas. Survey responses indicated some deterioration in credit conditions. Summary measures that reflect the rate of loan repayment, the rate of request for loan renewals or extensions, and the level of collateral requirements required to secure loans, all deteriorated. Bankers also noted increased demand for farm loans, and the recent decline in interest rates was reported to have bottomed out. Farmland values The almost 3 percent increase in the value of District farmland in the first quarter of 2002 was the largest quarterly Percent change in dollar value of “good” farmland XII VI Top: January 1, 2002 to April 1, 2002 Bottom: April 1, 2001 to April 1, 2002 January 1, 2002 to April 1, 2002 Illinois Indiana Iowa Michigan Wisconsin Seventh District +1 +2 +2 +7 +3 +3 +5 +7 April 1, 2001 to April 1, 2002 +3 +6 +5 +8 +9 +6 II I –2 +2 +4 +5 +4 +6 +9 +8 *Insufficient response. VII XIV –1 +11 IV * X –1 +7 VIII * –1 +4 III * +1 +1 +1 +5 XV IX XI +1 +3 XVI +2 +7 An increase in cash rents for farmland reflected the higher market prices reported, although rents increased more slowly than did sale prices. On average, cash rents were up about 2 percent from a year ago. Cash rental arrangements accounted for 72 percent of the farmland rental contracts according to respondents; about 25 percent of rental arrangements were on a share crop basis. A substantial disparity in the form of rental contracts continued across the District states. In Illinois, 55 percent of rentals were reported to be on a cash basis and 40 percent were share basis. By contrast, the proportions in Wisconsin were 89 percent cash and 8 percent share crop. Nominal and real farmland values In addition to questions about land values and credit conditions, we asked the bankers to comment on concerns about production agriculture in their respective service area. During the past two to three years a recurring theme in these responses has focused on three components of the same issue—farm income. The first component centers on the negative impact of low commodity prices on District farmers’ financial statements. The second centers on what they view as the critical role the federal farm program plays in keeping many farmers financially viable. And the third is an observation that many farmers continue to operate by drawing down their equity base to finance operating expenses—making them more susceptible to financial stress and increasingly dependent on agricultural subsidies for their survival. The value of farmland is a major portion of that equity base. The last issue of AgLetter observed that in 2000, after 19 years, District farmland prices had recovered to match their previous high. Farmland prices, for the District overall, have since increased further. While farmland prices for the District overall are at record levels, that fact may not be as favorable to the industry as a casual review might suggest. Compared to the previous price peak in 1981, the end-of-2001 average was up only 11 percent (about 0.5 percent per year, on average). Of course, the rate of appreciation in farmland prices depends importantly on the point of reference. For example, relative to the most recent trough in prices, 1986, the annual average price appreciation was about 8 percent. And, over the 30-year period, 1971 to 2001, farmland prices increased 275 percent (9.1 percent per year, on average). However, all of these changes reflect asset value changes in the nominal price of farmland. How does this nominal appreciation in the price of District farmland compare with the real, or inflation-adjusted, change? Furthermore, how does the real change in District farmland prices compare with the real change in an alternative measure of equity investment—for example, the Standard and Poor’s (S&P) index of the stock value of 500 major industrial firms? Not well, as it turns out. There is not space in this AgLetter for an exhaustive analysis of issues associated with nominal/real changes in farmland values. However, we visit this issue to point out the complexity associated with nominal/real asset valuation (an issue not unique to farmland) and to raise the question of risk associated with a key farm asset whose value has not kept pace with inflation over a substantial period of time. For example, between the fourth quarter of 1979 (the peak in District real farmland values) and the end of 2001, average real farmland values in the District declined 49 percent (an average of about 2.2 percent per year). Over the 30-year period 1971 to 2001, there was still a real decline of 14 percent (an average negative 0.5 percent per year). On the other hand, since the most recent trough in farmland prices, 1986, the annual average price appreciation was about 2.4 percent (see chart). Alternatively, consider an example of the change in the real value of a non-farm equity. The inflation adjusted S&P 500 Composite index in the fourth quarter of 2001 stood 354 percent above its fourth-quarter 1979 average, 168 percent above its fourth-quarter 1971 average, and 185 percent above its fourth-quarter 1986 average (annual average increases of 16 percent, 5.6 percent, and 12.4 percent, respectively). In short, for these three periods the inflation adjusted appreciation of an investment in S&P 500 “index-industries” exceeded by a substantial amount a comparable investment in District average farmland. (Of course, the magnitude and direction of change critically depends upon the period selected for comparison.) Credit conditions Bankers reported deterioration in agricultural credit conditions in the first quarter of 2002. Less than 4 percent of Indexes of selected equity values 1971=100 1500 Nominal S&P 500 index 1200 900 600 Real farmland values Real S&P 500 index Nominal farmland values 300 0 1971 ’77 ’83 ’89 ’95 ’01 Note: Data are constructed from Federal Reserve Bank of Chicago Land Value and Credit Conditions Survey, S&P 500 Composite Index, and Bureau of Labor Statistics CPI-U. Credit conditions at Seventh District agricultural banks Interest rates on farm loans Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 Operating loans1 Feeder cattle1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 1998 Jan-Mar Apr-June July-Sept Oct-Dec 134 127 117 113 113 102 104 121 84 74 60 57 68.9 72.7 72.0 70.3 9.52 9.54 9.43 9.09 9.51 9.55 9.41 9.07 8.50 8.52 8.33 8.06 1999 Jan-Mar Apr-June July-Sept Oct-Dec 120 115 109 107 119 107 94 104 40 50 63 72 69.9 71.7 72.7 72.7 9.03 9.11 9.32 9.44 9.01 9.08 9.28 9.41 8.06 8.18 8.42 8.59 2000 Jan-Mar Apr-June July-Sept Oct-Dec. 121 109 106 105 95 76 82 92 77 72 77 81 72.9 75.5 76.9 74.9 9.78 10.43 10.17 9.92 9.72 10.14 10.14 9.90 8.89 9.21 9.18 8.90 2001 Jan-Mar Apr-June July-Sept Oct-Dec 118 106 91 101 101 109 127 129 67 73 86 75 75.0 75.1 74.9 72.8 9.16 8.60 8.01 7.41 9.17 8.58 8.07 7.51 8.23 7.91 7.47 7.21 2002 Jan-Mar 108 118 66 72.7 7.33 7.48 7.22 1 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. 2 the respondents indicated that the rate of loan repayment increased (relative to a year ago) while 38 percent noted a lower rate of loan repayment. Both of these responses represented deterioration in the rate of loan repayment relative to the fourth quarter of last year. Bankers also said the rate of request for loan renewals or extensions rose, with 39 percent of the bankers noting an increase, while only 6 percent reported a reduction. Bankers’ concern regarding credit worthiness was reflected by additional requirements to secure loans. The proportion of respondents reporting higher collateral requirements increased from 24 percent in the final quarter of 2001 to 31 percent in the first quarter of 2002, the highest proportion of bankers reporting increased collateral requirements since the third-quarter of 1987. Higher loan demand was reported by a larger proportion of bankers than was the case in the two previous surveys. However, 55 percent of the respondents noted that demand remained unchanged from a year ago, suggesting a high degree of stability in agricultural loan demand. Recent declines in farm loan interest rates virtually halted in the first quarter of 2002. By contrast, during 2001 the average quarterly decline reported in operating loan rates was 63 basis points. Looking forward Bankers reported they expect the demand for non-real-estate farm lending to increase in the second quarter of 2002, relative to a year ago. They continued to expect the increase would be concentrated in operating loans, with 40 percent of the respondents expecting an increase in this category. Demand for category-specific lending for feeder cattle, grain storage construction, and farm machinery loans remained weak with a substantially larger proportion of the bankers expecting decreased loans than those who expected increases. Jack L. Hervey Senior economist AgLetter (ISSN 1080-8639) is published quarterly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Jack L. Hervey, senior economist, and members of the Bank’s Research Department, and is distributed free of charge by the Bank’s Public Information Center. 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. To subscribe, please write or telephone: Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 Tel. no. 312-322-5111 Fax no. 312-322-5515 AgLetter is also available on the World Wide Web at http://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) Barrows and gilts ($ per cwt.) Steers and heifers ($ per cwt.) Milk ($ per cwt.) Eggs (¢ per doz.) April April April April April April April April April April April 95 100 1.86 99.90 4.38 2.80 90 30.70 71.20 12.50 51.9 –9.5 –14.5 –4.1 9.3 0.0 –2.4 –5.3 –15.4 –4.2 –1.6 –24.2 –10 –3 –2 1 4 –2 –17 –36 –11 –14 –20 –5 –2 –8 28 –12 9 –8 –36 –5 5 –20 Consumer prices (index, 1982–84=100) Food April April 180 176 0.6 0.1 2 3 5 6 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.) March 1 March 1 March 1 April April April 5,796 1,336 1,211 2.19 1.67 12.5 N.A. N.A. N.A. 6.6 5.8 –2.0 –4 –5 –9 13 9 3 3 –4 –15 8 20 1 Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments February February February February 12,900 5,235 7,665 N.A. –25.1 –39.7 –10.2 N.A. –3 1 –5 N.A. –2 –1 –2 N.A. Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) March February March February 4,436 161 64 67 –4.8 8.9 –52.0 –10.3 –9 13 –53 –24 –5 12 –42 –5 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines April April April April 8,220 5,684 2,536 419 39.6 43.2 32.2 17.7 –8 2 –25 15 1 12 –17 7 N.A. Not applicable *20 selected states. **Includes net CCC loans.
@FedFRASER