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FARM and RANCH BULLETIN Federal Reserve Bank of Dallas A pril 1976 RISE IN FARMLAND VALUES SLOWS AS FARM INCOME SLIDES Farmland values in the United States contin ued rising in 1975 but at a slower pace than in recent years. The rate of increase in land values had begun easing in 1974, when net farm income dropped from its record high in 1973. Apprecia tion in rural land values was also tempered by the slowdown in the general economy in 1974 and early 1975. National survey According to a recent U.S. Department of Argriculture survey, the average per-acre value of the nation’s farm and ranch land rose 12 per cent in the year ended in November 1975, well below the 21-percent gain for the previous 12 months. Where the monthly rate of increase was 1.75 percent between November 1973 and N o vember 1974, it dropped to 1 percent by Novem ber 1975. However, the average price of rural land in the United States has nearly doubled since November 1969. Even though grain prices weakened in the second half of 1975, states in the major grainproducing areas— the Northern Plains and the Com Belt— registered the largest increases in per-acre values. North Dakota and Indiana, with 27 and 25 percent increases, had the largest yearto-year gains. And farmland values in Iowa, Min nesota, Illinois, and West Virginia also increased over 20 percent. Moreover, cropland values in creased more than grazing land in the states where livestock makes an important contribution to income. Most respondents to the USD A survey ex pected farm and ranch land values to increase or remain unchanged in coming months. Only 6 percent of them believed values would fall. The number of potential buyers of farm real estate increased moderately in the year ended November 1975. But the number of farms and ranches offered for sale was essentially the same as a year earlier. And credit remained readily available despite slightly higher interest rates on farm mortgage loans. Appreciation in farm real estate values in the Southwest has been curtailed by low farm and ranch income in 1974 and 1975. Incomes of cot ton growers have been reduced by low output and more costly inputs in the past two years, while grain farmers have been faced with fluctu ating prices. And cattle producers have been squeezed by depressed prices and escalating costs of feeding and maintaining cow herds since 1974. Gains in land values in southwestern states in the year ended November 1975 trailed the na tional average, the USDA survey shows. Values increased 7 percent in Oklahoma, 6 percent in New Mexico, 3 percent in Texas and Louisiana, and only 1 percent in Arizona. Differences among the states reflected varying income positions of livestock and crop producers, as large gains in cropland values were offset by declines in ranchland values. Southwest survey According to a January 1976 survey of Elev enth District commercial bankers conducted by the Federal Reserve Bank of Dallas, the average per-acre values of farmland in the Southwest rose less than 5 percent from January 1975 to January 1976. Dryland cropland and ranchland values advanced 3 percent, while irrigated land appreciated 5 percent. Survey respondents expected only moderate increases in farmland values this spring. Sixteen percent expected an upward trend in farmland values, while 81 percent believed values would not change. And 3 percent indicated rural land values would drop. The change in farmland values last year varied across the Southwest. Respondents in East Texas reported marginal price declines in dryland farm land and ranchland. In Upper South Texas, the Upper Coastal Prairie, and the Northern Blacklands of Texas land values were stable. Locales with the largest gains in land values were the Lower Rio Grande Valley, Southern New Mexico, and the Northern High Plains. prices with relatively low production costs b o l stered market values of rural land. But with fluctuating commodity prices and inflated prices of inputs pushing costs up, farm income has de clined since 1973. Moreover, taxes on farmland in the United States advanced about 5 percent in 1975 and will likely be higher in 1976. Although farmland values are expected to con tinue rising in 1976, the rate of appreciation will be determined by incomes from major crops, im provements in the financial position of the live stock industry and the general inflationary trend. But the rise in rural land prices in the High Plains of Texas, New Mexico, Oklahoma, and Kansas could be dampened by drouth conditions that already have curtailed wheat production, INCREASE IN AVERAGE PER-ACRE VALUE OF FARMLAND © 0 - 9 ©10-19 Outlook uncertain © 20-27 The acceleration in land values that began in 1972 can be largely attributed to record farm prices. Before costs of inputs— fuel, fertilizer, labor, equipm ent, and building materials— began climbing rapidly in early 1973, high farm “Average of Georgia and A lab am a indexes ‘ Average for M aine, New H a m p s h ire , Verm ont, M assachuse tts, Rhode Island , and C onnecticut SOURCE: U.S. D e p a rtm e n t of A griculture thus reducing farm income. And gains in the market value of ranchland will be limited until cattle markets improve. PRICE SPREAD FOR A MARKET BASKET OF FARM FOODS 2.4 THOUSAND DOLLARS ------------------------------- MARKETING MARGINS WIDEN DESPITE LOWER FARM PRICES The spread between farm value and the retail cost of a market basket of food produced on U.S. farms widened in the fourth quarter of 1975. D e spite lower prices for many farm products— hogs, broilers, wheat, and oilseeds— marketing spreads for all foods were pressured by rising nonfarm costs of packaging materials, energy, interest rates, and transportation. And labor costs, the biggest nonfarm expense for food marketing firms, accelerated last year. The rate of gain in prices of materials and services purchased by food marketing firms is expected to slow as inflationary pressures on the economy ease. Therefore, growth in marketing spreads this year may be moderately less than the 9-percent increase last year. Retail costs of a market basket of food— the average quantities of U.S. farm-originated foods purchased annually per household— averaged $1,923 in the fourth quarter of 1975, 2 percent higher than in the third quarter and 7 percent higher than a year earlier. Meanwhile, the farm er’s share averaged $804, 4 percent lower than in the third quarter and only 6 percent above a year earlier. Consequently, the farm-retail spread was $1,119 at the end of 1975, 3 percent more than $1,082 at the end of the third quarter. In addition, the farmer’s share of each dollar that consumers spent for food in 1975 averaged 42 cents— down 15 cents from 1974. Marketing is a complex process involving as sembling, processing, transporting, storing, dis tributing, and selling food commodities. And marketing margins reflect the added costs of moving food products from farms to consumers in the package, form, and size demanded. There fore, prices consumers pay for food reflect more than the farm value of products. 1973 SOURCE: 1974 ' 1975 U.S. D e p a rtm e n t of A g ricu ltu re Seasonal or cyclical changes in prices of crop and livestock products are likely to cause short term changes in consumer food prices. But changes in the costs and profits of marketing firms are more likely to cause long-run changes in food prices. Generally, farm prices fluctuate upward and downward, reflecting changing sup plies of crop and livestock products. But rising food marketing costs are closely linked with non farm costs. Moreover, retail prices tend to in crease over time, but when reductions do occur, they usually lag farm price declines. FARM CREDIT SYSTEM UPS SHARE OF FARM LOANS Growth in lending by the Farm Credit System has increased faster than lending by commercial banks in recent years. Agricultural loans in the United States held by production credit associa tions and Federal land banks— two branches of the cooperative Farm Credit System— more than doubled from the beginning of 1971 through 1975, increasing from $12.5 billion to $27.4 billion. Loans held by commercial banks, on the other hand, increased from $14.9 billion to around $26.0 billion over the five years. In states of the Eleventh District, the total vol ume of loans extended by the production credit associations and Federal land banks surged. Loans outstanding in the five states were about $3.3 billion at the end of 1975, more than double the volume at the end of 1970. Debt held by pro duction credit associations tripled in Arizona and Louisiana, and loans held by Federal land banks doubled in New Mexico, Oklahoma, and Texas during the five years. Although farm income improved in the early 1970’s, demand for non-real-estate and real estate credit has accelerated. Highly inflated pro duction costs and skyrocketing farmland values have increased the credit needs of operators. Farmland prices have almost doubled since November 1969. And with the trend toward consolidating farms and ranches, demand for long-term credit has risen. Short and intermed iate credit requirements have grown with increas ing operating and machinery costs. Prices paid for all commodities and services have risen about 62 percent, and fertilizer costs have increased more than twofold. And with increased mechani zation of farm and ranch operations, machinery prices have advanced 75 percent. In addition, agribusiness industries have expanded their op erations, requiring large amounts of capital and credit. T o meet the growing needs for farm credit, production credit associations, Federal land banks, and commercial banks have expanded their loan volumes, albeit at different rates. The Farm Credit System, a nationwide operation with local and regional offices, obtains funds mainly by selling securities in money and capital markets. Through this System, the farming sec tor has a flexible supply of funds at a cost closely linked with interest rates in the national money LOANS HELD BY FEDERAL LAND BANKS AND PRODUCTION CREDIT ASSOCIATIONS BILLION DOLLARS SOURCE: Farm Credit Administration markets. Since production credit associations and Federal land banks specialize in extending loans to farmers and ranchers, their staffs can effi ciently provide credit to agriculture. Commercial banks, especially those in rural areas, tend to obtain most of their loanable funds from deposits of individuals and businesses in the community. The bank serves as an intermed iary between local savers and borrowers. Through a system of correspondent banking relationships, however, banks can obtain funds nationwide. Loanable funds at banks, nevertheless, are af fected by the rate of deposit growth and the relative strength of loan demand from other sec tors. And the aggressiveness with which bankers make farm loans depends largely on alternative uses and demand for funds. Prepared by Alan M. Young
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