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The Agricultural Newsletter from the Federal Reserve Bank of Chicago AgLetter Number 1946 FARMLAND VALUES AND CREDIT CONDITIONS of “good” farmland was down 4 percent from the third quarter of 2008, when the full extent of the decline in crop prices was unknown. With large year-over-year increases last year, increases for Illinois and Iowa land values from the second quarter to the third quarter were not enough to prevent yearover-year declines of 4 percent and 7 percent, respectively (see map and table below). Agricultural land values fell 1 percent in both Indiana and Wisconsin from the second quarter of 2009. The 2 percent quarterly gain for the District was the first since the previous fall. Comments from respondents indicated that pockets of strength existed around the District, primarily because of local competition. Also, ownership of additional farmland would allow operators who built up financial capital during the past few years to expand their operations and to reduce their exposure to hikes in land rental rates. Summary The agricultural sector continued to deal with challenging circumstances in the third quarter of 2009, as evidenced by agricultural land values falling 4 percent below those of the third quarter of 2008 in the Seventh Federal Reserve District. However, the value of “good” farmland increased 2 percent relative to the second quarter of 2009, according to 225 replies by agricultural bankers to the October 1 survey. Forecasts for farmland values in the fourth quarter of 2009 were down, with respondents expecting lower demand to purchase farmland by both farmers and nonfarm investors. Agricultural credit conditions in the third quarter were weaker than a year ago. Lower demand for non-realestate loans in the third quarter of 2009 contrasted with increased funds availability at District banks. Loan payment rates declined compared with the July through September period of 2008, whereas loan renewals and extensions rose. Farm operating and real estate loan interest rates were a bit lower. The banks’ loan-to-deposit ratios averaged 75.3 percent, the lowest level in over a year. November 2009 More of the responding bankers expected farmland values to slide rather than gain during the fourth quarter of 2009, though 69 percent expected stable values. With 27 percent anticipating decreases and only 4 percent anticipating increases, the respondents forecasted no turnaround in the downward trend for District land values. In a reversal from a year ago, the demand among farmers to purchase farmland was forecasted to ebb this fall and winter. More respondents anticipated lower rather than higher interest by farmers in acquiring agricultural Farmland values District farmland values were lower than the comparable period a year ago for the third quarter in a row. The value Percent change in dollar value of “good” farmland Top: July 1, 2009 to October 1, 2009 Bottom: October 1, 2008 to October 1, 2009 Illinois Indiana Iowa Michigan Wisconsin Seventh District July 1, 2009 to October 1, 2009 + 2 – 1 + 4 + 1 – 1 + 2 XII VI +2 –7 October 1, 2008 to October 1, 2009 – 4 – 2 – 7 0 – 3 – 4 +2 0 II I +3 – 6 +3 – 1 1 +8 III – 6 VII –3 +2 IV XIV * X +1 +4 VIII V +2 –9 *Insufficient response. * * IX +4 –3 0 –7 XV XI +2 –6 XVI – 2 +2 transfers from the previous fall and winter, whereas 37 percent anticipated lower volumes. With 52 percent expecting no change in the level of land transfers, farmland sales will likely slip below the pace of a year ago. 1. Repayment rates for non-real-estate farm loans index 200 150 100 50 0 1990 ’92 ’94 ’96 ’98 2000 ’02 ’04 ’06 ’08 land (30 percent versus 14 percent). The expectation remained the same for the interest from nonfarm investors to diminish: Just 17 percent of the responding bankers predicted higher demand for farmland among nonfarm investors over the next three to six months, and 39 percent anticipated lower demand. A key factor in the anticipation of lower demand for farmland was the diminished stream of earnings that farms would produce under current market conditions. Respondents expected lower net cash earnings for both crop and livestock operations this fall and winter compared with a year ago. For crop farms, the combination of lower corn and soybean prices and relatively less relief from high input costs led 85 percent of responding bankers to predict decreases in net cash farm earnings over the next three to six months compared with earnings the previous year. Only 4 percent foresaw increases. Moreover, respondents anticipated even more severe cuts than a year ago in net farm earnings for dairy farmers (1 percent up versus 83 percent down) and for cattle and hog farmers (2 percent up versus 84 percent down). Though the drag from feed costs was smaller, the slump in livestock product prices had not recovered enough from the recessionary hit on demand in order to boost livestock returns. These results were reinforced by the latest U.S. Department of Agriculture forecast for 2009 net cash income of $68.2 billion, a decrease of $29.3 billion from 2008. The decrease was due to both lower crop and livestock values of production (decreases of $17.9 billion and $21.8 billion, respectively), which were partly offset by lower costs of production. Total purchased inputs were estimated at $188.5 billion in 2009, a decline of $12.9 billion from 2008. Feed, fuel, and fertilizer expenses were the categories that decreased the most. Government payments rose a bit to $12.6 billion from disbursements in 2008. In another reversal from a year ago, 11 percent of the respondents anticipated higher volumes of farmland Credit conditions District agricultural credit conditions were, on balance, about the same as in the second quarter of 2009. The demand for non-real-estate loans was a bit stronger, with 25 percent of the bankers reporting demand increased for non-real-estate loans from a year earlier and 30 percent reporting that demand decreased. The index of loan demand was 95, a shade up from the previous quarter (see table on the next page). Wisconsin showed the biggest swing from three months ago: It had the highest percentage of bankers report non-real-estate loan demand was lower and the lowest percentage that it was higher. Repayment rates on non-real-estate farm loans were lower this past quarter than in the third quarter of 2008. With just 10 percent of the bankers reporting higher rates of loan repayment and 21 percent reporting lower rates, the index of loan repayment rates (89) was under 90 for the first time since 2006 (see chart 1). Loan renewals and extensions on non-real-estate agricultural loans rose from those in July, August, and September of 2008, with 24 percent of the bankers reporting an increase and 8 percent reporting a decrease. Wisconsin had the largest decline in loan repayment rates and the highest jump in the levels of renewals and extensions. Illinois, in contrast, had the smallest slip in loan repayment rates and no change in the level of loan renewals and extensions from a year ago. Funds availability bounced back from the lull during the July through September 2008 period. With 27 percent of the bankers indicating there were more funds available during the third quarter of 2009 than they had a year earlier and 6 percent reporting there were fewer, the index of funds availability rose to 121. Indiana was the outlier, as the availability of funds there was the same as a year ago. 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 ’08 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 2007 Jan–Mar Apr–June July–Sept Oct–Dec (index)b (index)b (index)b (percent) (percent) (percent) (percent) 128 121 118 110 113 115 118 126 131 117 122 149 78.4 77.8 78.1 77.2 8.61 8.65 8.42 7.82 8.60 8.63 8.40 7.89 7.67 7.70 7.53 7.09 2008 Jan–Mar Apr–June July–Sept Oct–Dec 110 101 117 115 129 124 103 110 147 137 115 113 75.9 75.2 78.8 76.4 6.74 7.06 6.74 6.21 6.86 6.77 6.85 6.33 6.41 6.51 6.56 6.23 2009 Jan–Mar Apr–June July–Sept 116 88 95 112 118 121 105 93 89 76.2 77.3 75.3 6.20 6.18 6.17 6.31 6.36 6.35 6.14 6.16 6.13 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. Note: Historical data on Seventh District agricultural credit conditions are available for download from the AgLetter webpage, www.chicagofed.org/economic_research_and_data/ag_letter.cfm. a b At 75.3 percent, the banks’ average loan-to-deposit ratios were 4.6 percent below desired levels. District banks tightened collateral requirements again this quarter, compared with the third quarter of 2008. Higher amounts of collateral were required by 24 percent of the responding banks, whereas 76 percent did not change their collateral requirements. Agricultural interest rates moved down to the lowest levels since 2004 (see chart 2 and table above). As of October 1, the District average for interest rates on new operating loans was 6.17 percent. Interest rates on operating loans ranged from 5.22 percent in Indiana to 6.80 percent in Wisconsin. Interest rates for farm real estate loans fell to 6.13 percent, on average, for the District. Illinois had the lowest rate for farm mortgages, 6.07 percent, and Indiana had the highest rate, 6.25 percent. Looking forward Responding bankers did not see agricultural credit conditions improving during the fall and winter—a complete flip from the trend of a year ago. Far more bankers expected the volume of farm loan repayments to decline (49 percent) over the next three to six months compared with a year ago than rise (2 percent). Furthermore, a surge in forced sales or liquidation of farm assets among financially stressed farmers (particularly livestock farmers) was predicted by the respondents for this fall and winter. The whole District looked like Wisconsin did already a year ago, with 37 percent of the bankers forecasting more forced sales or liquidations and 2 percent fewer. The recent data for Wisconsin were even worse, with over half of the bankers expecting higher levels of forced sales and liquidations. For the October through December period of 2009, 22 percent of the bankers anticipated higher non-realestate loan volume than in 2008 and 24 percent anticipated lower volume. Responding bankers predicted increases in operating loans (24 percent more forecasted increases rather than decreases) and Farm Service Agency guaranteed loans (26 percent). Livestock, farm machinery, grain storage construction, and real estate loans were anticipated to have lower volumes in the last quarter of 2009 than in 2008. Interestingly, in Indiana and Iowa more bankers forecasted increases rather than decreases in grain storage construction loan volume during the fourth quarter of 2009 relative to the same quarter of 2008. David B. Oppedahl, 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, 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. © 2009 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 period Value Prior period Year 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) Barrow and gilts ($ per cwt.) Steers and heifers ($ per cwt.) Milk ($ per cwt.) Eggs ($ per doz.) October October October October October October October October October October October 135 154 3.54 106 9.74 4.56 109 37.70 84.00 13.80 0.80 7.1 7.7 8.9 – 0.9 – 0.1 1.8 0.9 – 1.6 – 1.8 7.0 7.4 – 10 – 8 – 19 – 32 – 2 – 31 – 14 – 23 – 10 – 22 – 21 Consumer prices (index, 1982–84=100) Food October October 216 217 0.3 0.1 0 – 1 Two years ago – 4 3 8 – 17 17 – 40 – 17 – 13 – 13 – 36 – 14 3 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.)* September 1 September 1 September 1 September September September 1,674 138 2,215 2.23 2.00 13.9 N.A. N.A. N.A. 2.3 7.1 – 4.8 3 – 33 19 – 2 1 – 1 28 – 76 29 7 15 1 Agricultural exports ($ mil.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) September September September September 7,296 194 43 100 – 1.5 2.4 – 21.8 46.7 – 19 13 20 – 16 – 7 – 10 – 30 – 34 Farm machinery (units) Tractors, over 40 HP October 6,399 1.2 – 35 – 38 40 to 100 HP October 3,597 – 15.4 – 41 – 49 100 HP or more October 2,802 35.3 – 26 – 15 Combines October 910 – 32.9 – 7 35 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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