Farmland Buyers Hold Line on Leverage

May 9, 2018 04:59 AM
Farmland buyers in the western Corn Belt continued to show restraint on debt financing in 2017. That restraint provides stability to the farmland market during this correction.

Farmland buyers in the western Corn Belt continued to show restraint on debt financing in 2017. That restraint provides stability to the farmland market during this correction. 

The table below shows the debt restraint. It is compiled by Farm Credit Services of America (FCSAmerica), which is the dominant ag lender in Iowa, Nebraska, South Dakota and Wyoming. While the data speaks only to FCSAmerica, we suspect it is representative of other Midwestern farm credit associations. 

The data, provided by Jim Knuth, senior vice president with FCSAmerica, shows the steady restraint on leverage for farmland purchases during the run up and correction in farmland values. For example, the loan-to-collateral-value ratio on the association’s new loans in 2017 was 50%, unchanged from 2016.

That ratio bottomed at 43% in 2013, when farmland values peaked, and the ratio has increased gradually since then. That low reliance on debt financing in 2013 was an anomaly spurred by record farm incomes. Debt financing was heavily used prior to the surge in net farm incomes starting in 2010. The ratio was 53% in 2010 and declined to 48% in 2011. The rise to 50% in 2016 and 2017 suggests the market is returning to a more normal reliance on debt financing.

Average Real Estate Data

The other ratios in the table suggest a restraint on leverage. The debt-to-asset ratio was 34% in 2017. That’s within the 33% to 35% range that’s ruled since at least 2010.

The debt coverage and current ratios are weaker than previous years. This highlights the pressure on working capital that the current downturn in farm incomes has spawned. But with leverage on farmland still restrained, the prospects of a wave of forced land sales pressuring farmland values seems unlikely. 

In addition, the interest rate on the bulk of the recent farmland mortgages is locked in. That reduces the pressure of rising interest rates on servicing that debt. 

Yes, we remain concerned that farm finances are near a tipping point. The debt-to-income ratio (February 2018 LandOwner) is projected to reach 6.5:1 in 2018. A rush to leverage to maintain spending would tip the scales toward more asset liquidation, which would be negative to farmland values. But the data from this table suggests farmers and lenders are working hard to keep the leverage risk under control.

Farmland Price Boost

FCSAmerica’s figures suggest a 2.4% rise in price of Iowa farmland sold in 2017. The average price paid for an acre of cropland (at least 85% tillable, 40 or more acres) was $114.19/CSR2 point. That compares to $111.49 in 2016 and is slightly higher than the $114 notched in 2015. That figure was $145.21 in 2012 and $137.18 in 2013. 

The number of farms sold remains low, as well, despite a slight increase the past two years. FCSAmerica shows 667 Iowa farms sold in 2017, up from 655 in 2016 and 651 in 2015. But that figure is down from 860 in 2014 and 932 in 2013. 

Farmers remain the dominant buyers—76% of all purchases in 2017 were purchased by farmers, down from 78% in 2016 and 81% in 2013.

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