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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1932 May 2006 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS CONFERENCE ANNOUNCEMENT Summary An April 1, 2006 survey of 237 bankers in the Seventh Federal Reserve District showed that increases in agricultural land values were diverging within the District. On average, District farmland values slowed to 9 percent growth from the previous year, but double-digit increases in Michigan and Wisconsin outpaced the rest of the District. The value of “good” agricultural land increased 3 percent for the first quarter of 2006, with the two northern states also exceeding the District average. With about 20 percent more of the bankers expecting increases versus decreases in farmland values from April through June, growth should continue, though more slowly in Illinois and Iowa. Almost half of the respondents replied that the demand to purchase farmland was higher over the winter than a year ago, although the share purchased by farmers had declined even as the amount of farmland on the market and sold had risen. Cash rental rates for farmland rose the most in the southern states of the District, resulting in a 3 percent climb overall. Globally Competitive Agriculture and the Midwest In late September 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 information and the forthcoming agenda. in the demand for loans and a slight increase in the availability of funds. About 10 percent of the banks continued to tighten collateral requirements, as in recent quarters. Farmland values With slower growth in Illinois and Iowa outweighing faster growth in Michigan and Wisconsin, the average year-overyear increase in the value of “good” agricultural land for the District eased to 9 percent as of the first quarter of 2006 (see map and table below). Illinois and Iowa showed slower gains of 7 percent and 6 percent, respectively, and Indiana held steady with a 9 percent gain, while Michigan and Wisconsin had increases in the teens for farmland values. The changes in farmland values for the first quarter of 2006 followed similar patterns, though the District average increased to 3 percent. The most likely explanation As interest rates continued to march upward, credit conditions slid in the first quarter of 2006 relative to the previous year. Repayment rates dipped for non-real-estate loans, and renewals or extensions of loans picked up in that quarter compared to a year earlier. Yet, there was a jump Percent change in dollar value of “good” farmland XII Top: January 1, 2006 to April 1, 2006 Bottom: April 1, 2005 to April 1, 2006 January 1, 2006 to April 1, 2006 Illinois Indiana Iowa Michigan Wisconsin Seventh District +2 +3 +2 * +5 +3 VI +9 +15 April 1, 2005 to April 1, 2006 +7 +9 +6 * +15 +9 II I +1 +6 V +4 III +15 XIV * X +7 +8 VIII +5 +3 *Insufficient response. VII 0 +15 +2 IV +9 –1 +1 * * IX +1 +6 XV +4 +12 XI +2 +7 XVI +2 +7 lower). Once again this phenomenon was most apparent in Illinois, with 61 percent responding that farmers bought a smaller share of the acres sold. 1. Indexes of District cash rental rates 1981=100 120 Slightly fewer bankers than last quarter expected farmland values to increase (27 percent), while 5 percent expected farmland values to go down during April to June. Over 40 percent of the respondents anticipated increases in Indiana and Michigan, with Wisconsin next closest at 30 percent. In Illinois and Iowa, less than a quarter of the bankers predicted higher farmland values, though only 5 percent foresaw farmland values going lower. 100 Nominal cash rental rates 80 60 Cash rental rates adjusted by CPI-U 40 1981 ’86 ’91 ’96 2001 ’06 Note: Derived from Federal Reserve Bank of Chicago farmland value surveys and BLS Consumer Price Index series. for the divergence of growth rates could relate to the different mixes of farming among District states. Michigan and Wisconsin had the most diverse agricultural sectors in the District, relying less on traditional corn and soybean operations. Also, improved weather in 2005 boosted the output of corn and soybeans in Michigan (6 percent for both) and Wisconsin (11 percent and 12 percent, respectively), whereas the rest of the District faced output reductions (except for Iowa soybeans). Moreover, the larger role of recreational buyers might have intensified competition for land in Michigan and Wisconsin. Wisconsin housing markets also have maintained more of their strength, keeping pressure on agricultural land from developers. In addition, the amount of farmland for sale barely increased in Michigan and Wisconsin, whereas at least a third of the respondents indicated the amount was higher in the other District states. Overall, reports of more farmland up for sale (37 percent) outnumbered those of less farmland up for sale (17 percent). Moreover, between 35 percent and 40 percent of the bankers responded that the number and acreage of farms sold was higher than the same period a year ago, whereas 17 percent reported lower activity. With about half of Illinois respondents reporting a higher number of farms sold, Illinois led the District in farm real estate activity for another year. The percentage of respondents that reported higher demand to purchase agricultural land than the first quarter of 2005 fell to 48 percent, with 11 percent reporting lower demand. In Illinois, Indiana, and Wisconsin, at least half of the bankers replied that demand for farmland was higher, with less than 10 percent noting lower demand. In Iowa and Michigan, the majority had not seen higher demand for farmland, though less than a quarter had seen lower demand. Also, the surveys indicated that farmers purchased an even lower share of the acreage sold compared to a year ago (9 percent reported a higher share versus 44 percent For farmland operated by someone other than the owner in the District, 79 percent was reported as cash rented and 19 percent as crop-shared, the same breakdown as a year ago. Cash rental rates were up 3 percent from 2005. The annual increases in cash rental rates for Illinois, Indiana, and Iowa kept pace with the District, but those in Michigan and Wisconsin trailed. The “real” cash rental rate for the District fell 0.8 percent from a year ago, adjusting for inflation using the Consumer Price Index. Even as nominal cash rental rates have increased above the levels of the early 1980s, the index of cash rental rates adjusted for inflation has barely managed to stay level after dropping in half in the 1980s (see chart 1). Credit conditions Credit conditions faltered in the first quarter of 2006, as higher input costs compounded the effects of lower agricultural prices for many District products. The responses showed that non-real-estate farm loan repayment rates were lower than those of the first quarter in 2005. With only 8 percent of the bankers indicating higher rates of loan repayment and 22 percent lower rates, the index of loan repayments dropped to 87, matching the lowest value of the past two and a half years. In addition, there were more loan renewals and extensions, with 23 percent of the respondents reporting increases and 11 percent decreases. The banks 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 demand Funds availability Loan repayment rates Average loan-todeposit ratio Operating loans1 Feeder cattle1 Real estate1 (percent) (percent) (percent) (percent) (index) 2 (index) 2 (index) 2 2003 Jan–Mar Apr–June July–Sept Oct–Dec 109 99 95 97 130 138 129 127 79 84 86 104 72.4 72.7 72.9 71.8 6.61 6.43 6.41 6.26 6.75 6.52 6.47 6.35 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 131 102 87 76.7 8.30 8.27 7.48 Note: Historical data on credit conditions at Seventh District agricultural banks is available for download as a spreadsheet from the AgLetter homepage, http://www.chicagofed.org/economic_ research_and_data/ag_letter.cfm. 1 At end of period. 2 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. increased collateral requirements a bit from last year, as 13 percent required more collateral in the first three months of 2006 and only 1 percent required less. With tighter cash flows, the index of loan demand surged to 131, the highest value in eight years, as 40 percent of the bankers reported higher demand for non-realestate loans and 9 percent lower demand. Agricultural banks had some additional funds available to lend in response to this demand, with 18 percent of the bankers stating that more funds were available from January to March than a year before and 16 percent stating that fewer funds were available for lending, lowering the index of fund availability to 102. Loan-to-deposit ratios averaged 76.7 percent, the second highest value ever recorded in the survey, but were still below the level desired by the responding bankers (80.1 percent). Bankers indicated that the use of farm loan guarantees provided by the Farm Service Agency (FSA) of the U.S. Department of Agriculture remained close to 5 percent of the District farm loan portfolio, possibly constrained by a lack of budgeted funds. Agricultural interest rates continued to rise at the end of the first quarter of 2006, completing a second year of upward movement (see chart 2). As of April 1, 2006, the District average for interest rates on new operating loans was 8.30 percent, over 200 basis points above the cyclical low two years ago. Interest rates for farm mortgages have risen 161 basis points in two years to an average of 7.48 percent, almost half way back to the cyclical peak of 2000. Looking forward Respondents expected to make more agricultural loans in the second quarter of 2006 than they did in 2005. They primarily anticipated these to be operating loans, with 54 percent of the bankers foreseeing higher operating loan volume versus 7 percent lower. Loan volumes for feeder cattle, dairy, and farm machinery were expected to decline. An almost even split of the bankers anticipated higher versus lower real estate loan volume from April to June of 2006, leaving 60 percent expecting volumes to be the same. 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 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.) April April April April April April April April April April April 115 129 2.11 106.00 5.39 3.90 104 39.60 89.7 12.1 51.2 Consumer prices (index, 1982−84=100) Food April April Prior period Year ago Two years ago 0.9 9.3 2.4 9.2 – 3.2 2.9 – 5.5 – 8.3 – 3.5 – 4.0 – 23.6 –5 8 5 7 – 11 16 – 15 – 23 –9 – 20 8 –8 4 – 27 19 – 44 1 – 17 – 17 1 – 33 –33 202 194 0.9 – 0.2 4 2 7 5 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 6,987 1,669 972 1.97 1.61 14.2 N.A. N.A. N.A. – 10.7 – 13.8 – 2.6 3 21 –1 5 –5 4 33 84 –5 1 –6 8 Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) March March March February 6,324 182 96 73 13.2 30.6 – 14.1 – 15.7 15 28 –1 –2 9 7 26 – 25 April April April April 10,548 7,947 2,601 414 20.3 24.5 9.0 – 0.5 –6 2 – 24 – 10 –4 5 – 24 – 11 Farm machinery (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines N.A. Not applicable *23 selected states. Note: AgLetter will no longer publish data on receipts from farm marketings. Please contact the USDA for this data. Sources: Data from USDA, U.S. Bureau of Labor Statistics, and the Association of Equipment Manufacturers.
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