Farmland Values Rise 10% Says Chicago Fed

Farmland values rose 10% year-over-year due to strong agriculture prices and rising farm income, according to the Federal Reserve Bank of Chicago’s November AgLetter. The Seventh Federal Reserve District also reported quarter-over-quarter farmland values rose 3%. Farmland values are expected to be up in the fourth quarter again due to high demand for agricultural land among farmers.

Credit conditions also improved in the third quarter due to higher expected farm income and loan repayment rates. Interest rates on agricultural operating and real estate loans declined to the lowest levels recorded in the history of the survey.

Over the past 12 months economic conditions have stabilized and lending has become more available. Higher grain prices have encouraged farmers to reinvest their cash flow back into farmland to expand their operations. This fall will see higher volumes of farmland sales due to the early harvest, high grain prices, and potential change in tax legislation. Landowners will also be making up for the lack of farmland sales last year due to the late harvest.

Values

In the Seventh District, farmland values rose 10% compared to the third quarter of 2009, with values increasing 13% in Iowa, 11% in Indiana, 10% in Michigan, 8% in Illinois, and only 3% in Wisconsin. Quarter-over-quarter farmland values 3%. Farmland values increased 6% in Iowa, 3% in Illinois and Michigan, 2% in Indiana, and 1% in Wisconsin compared to the second quarter of 2010.

“The market is tight right now as high corn prices make farmland an attractive investment for farmers. If you believe corn is going to stay above $5.00, farmland is undervalued,” said Greyson Colvin, Managing Partner of Colvin & Co.

Farmland values are also expected to rise during the fourth quarter of 2010 according to survey respondents. 48% of respondents expect farmland values in the Seventh District to rise and 49% expect stable values. 60% of responding bankers also expect strong demand among farmers to purchase farmland this fall and winter. Interest in farmland by outside investors is also expected to grow as 37% of respondents expect higher demand of farmland among nonfarm investors.

Credit

Credit conditions in the Seventh District continued to improve during the third quarter. The loan repayment index jumped in the third quarter to 114 from 85 in the second quarter. Availability of credit expanded as the funds availability index rose to 138 from 122 last quarter, and 121 a year ago.

Collateral requirements were tightened in the third quarter. 22% of respondents required more collateral, while 78% left collateral requirements unchanged. The average loan-to-deposit ratio was 73.2%, slightly below last quarter’s 74.5% and last year’s 75.3%

Interest rates declined to the lowest levels recorded in the history of the survey. The average interest rate of agricultural real estate loans was 5.81%. Iowa had the lowest interest rate of 5.64% and Michigan had the highest at 6.16%.

Outlook

A perfect storm of rising grain prices, the Russian wheat crisis, lower U.S. grain production, and grain supplies at decade lows have driven an appetite for agricultural related investments. 2010 net cash farm income is expected to increase to $85.3 billion, a 23% increase over 2009 farm income according to the USDA.

We expect farmland to be in the sights of many investors, including farmers. Grain supplies should stay tight as it will take time for supply to catch up with demand. High grain prices will attract capital to the farm sector, and one of the best ways to capitalize on this momentum is farmland. It is the one input in the farming equation that cannot be substituted.

Read more about agriculture and farmland at http://farmlandforecast.colvin-co.com.