For the last few years the farmland market has been like riding a roller coaster. Since 2009, everyone was strapped in for a steep, dramatic incline. Those who owned land enjoyed the view from the top as their equity ballooned.
But, what goes up must come down. All signs now point to softening farmland values, but how deep will the plunge be?
“I think we have seen a peak for the time being,” says Michael Duffy, former Iowa State University economist and director of the Iowa Land Value Survey. “Commodity prices and farm income are settling back to more expected levels, and I think land values will probably move sideways for a while.”
USDA projects net farm income will decline by 32% in 2015, which is the lowest since 2009. This drop in income is due to the third straight year of declining profitability (cash receipts) for crops.
“Following several years of strong income and gains in cropland values, 2014 appeared to be a turning point for crop producers in our district,” says Nathan Kauffman, assistant vice president of the Federal Reserve Bank of Kansas City. “Lower crop prices and elevated input costs trimmed margins and slowed cropland value appreciation.”
Looking forward, Kauffman says, bankers in the Tenth Federal Reserve district (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri) expressed concern that tighter profit margins, higher debt levels and a decline in cropland values may adversely affect farm loan performance in 2015. Most of the district’s bankers expect cropland values to decline in 2015—a drop of 10% to 20% for non-irrigated cropland.
Due to smaller profits, less land has changed hands in the last year, says Mike Morris, 1st Farm Credit Services chief appraiser. “We’re seeing a softening market, but no significant slide,” he says. “If there was a large supply of land on the market, it would likely depress land values further.”
Profitability in the cattle industry is increasing demand for ranch and pastureland. USDA projects cattle receipts to reach a record high in 2015.
For the livestock-heavy states in the Great Plans and West, Kauffman says, record high prices for both feeder and fed cattle continued to fuel demand for good-quality pasture in 2014.
In the Seventh Federal Reserve District (northern Illinois, the majority of Indiana, Iowa, southern Michigan and southern Wisconsin) livestock operations are also lifting farmland values, says David Oppedahl, Federal Reserve Bank of Chicago senior business economist.
“Yet the farm sector should be cautious about possible further impacts of these price trends, especially because feed costs may not get much, if any, lower,” Oppedahl says. “Nevertheless, agricultural credit conditions indicated only modest stress, and the vast majority of farm operations are expected to have no trouble qualifying for operating credit in 2015.”
As a result, large numbers of forced sales of farmland are unlikely to occur in 2015. “By avoiding such a scenario, farmland values should simply drift lower over the coming months,” he says.
Reports from three Federal Reserve Banks show that farmland values are holding steady or showing slight declines. More than 450 banks from the three districts are surveyed about land values, farmers’ financial position and other economic indicators.
(Changes in farmland values from Jan. 1, 2014 versus Jan. 1, 2015)
This is the first decline in land values for the district since 1986.
Kansas City Region
- Non-irrigated cropland: 0.1%
- Irrigated cropland: 0.8%
- Ranchland: 10.5%
Profits in the livestock sector continue to fuel demand for ranchland in the district.
St. Louis Region
- Quality farmland: 0.8
- Ranch or pastureland: -2.6
Most bankers in the district expect farmland prices to decrease over the next three months.