Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.
Drought Slows Increases in Farmland Values
Aug 20, 2012
Farmland values rose 15% in the last 12 months, slowing down from last quarter due to concern over drought conditions, according the Federal Reserve Bank of Chicago. The value of "good" farmland increased 1% in the second quarter of 2012 compared to the first quarter of 2012, the smallest quarterly increase in two years. All District states posted year-over-year increases in farmland values and the largest year-over-year land value increase came from Iowa, with a 24% increase.
Although there is concern over the recent drought conditions, a majority of bankers still believe there will be an increase or pause in farmland prices in the third quarter. 22% of bankers surveyed estimated farmland values will rise in the third quarter of 2012, only four percent believe prices will fall. The consensus, over 70%, believe farmland prices will level off through the third quarter.
Even with farmland prices stable to increasing, output is estimated to decrease significantly. The previous drought of this magnitude, in 1988, saw a decrease of 30% to 40% in soybean and corn yields. Due to improved seed traits and better farming practices, corn production should only decline by 22% and soybean production by 19% in the district year over year.
According to the USDA's most recent forecasts, average corn prices for the 2012-13 crop year are estimated at $7.50 to $8.90 a bushel, a significant increase from 2011. Soybean average price range is estimated at $15.00 to $17.00 per bushel.
In addition to high prices, crop insurance will also help farmers weather the drought. Only 22% of U.S. corn acres were not insured in 2011. The majority of the district was declared a disaster area, resulting in the federal government releasing additional funds and lowering rates on farm loans.
The agricultural credit condition avoided a descent in the 7th district in the second quarter of 2012. Year over year funds available has improved as 65% of respondents indicated their banks had more funds available.
The average loan-to-deposit ratios increased to 68.1, below the level one year prior. Banks were more restrictive this quarter requiring more collateral for loans. Nine percent of banks that were surveyed required more collateral, and none required less.
Interest rates for agricultural loans continued to declined in the second quarter of 2012 and set a new record low for the fifth straight quarter. Farm operating loan's average interest rate was 5.27% and real estate loans fell to 4.94%.
3rd Quarter Outlook
The recent drought has left farmers and bankers uncertain as to what the near future holds for farmland values and farm income. Non-real-estate agriculture loans are expected to decrease in the third quarter of 2012 compared to the third quarter of 2011, whereas farm mortgage volume is expected to increase. Farmers will remain on the sideline, for the most part, when purchasing farmland until crop insurance payments are issued and harvest is complete. We feel this may pose as an opportune time for investors to purchase farmland as the agriculture fundamental outlook remains very strong.
The Federal Reserve Bank of Chicago’s second quarter survey of Farmland Values and Agricultural Credit Conditions Report is a summary of the 7th District’s value of farmland, farm loan portfolio performance, and on-farm income. The 7th District consists of the entire state of Iowa, and portions of Illinois, Indiana, Wisconsin, and Michigan.
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