Power Hour: Drought Slows Growth in Farmland Values

August 31, 2012 09:31 AM
Power Hour: Drought Slows Growth in Farmland Values

The sizzle in farmland value increases turned to a slow burn in the second quarter.

One key reason: the drought. The rise in the value of "good" farmland values was 1% in April to July, based on a survey of 205 ag bankers by the Federal Reserve Bank of Chicago.

However, 22% of the bankers anticipating higher farmland values for the third quarter of 2012, and only 4% are looking for lower ones. So, the drought does not seem to have stifled all the momentum of rising agricultural land values.

Power Hour webYear-over-year numbers show a continuation of rapid increases. Iowa farmland values bested all others in the Chicago Fed’s region, up 24%, compared to the district-wide average of 15%. Illinois values rose 15% July 2012 vs. the same month a year ago; Wisconsin rose 13%; with Indiana values, up 12%.

Responding bankers predict that the drought will cause a leveling off in farmland values, but land will not face much downward pressure from the severe drought’s effects. The consensus is for farmland markets to move sideways in the third quarter.

Despite the drought, agricultural credit conditions for the Seventh Federal Reserve District avoided deterioration in the quarter. Funds availability once again improved from a year ago, with 65% of bankers reporting that their institutions had more funds available and only 1% saying they had less. The index of funds edged higher to 164, setting another record for the Fed survey.

One respondent commented that "farmers have become depositors, not borrowers." In this regard, 1986 was the last time that the index of non-real-estate loan demand recorded a value lower than its current reading. Even so, bankers reported that their institutions became slightly more restrictive on collateral requirements for loans in the second quarter of 2012 relative to the second quarter of 2011.

Repayment rates for non-real-estate farm loans were better during the second quarter of 2012 relative to the same quarter a year earlier. Agricultural loans with "major" or "severe" repayment problems were under 2% of district loan volume. Wisconsin was the only district state that had over 4% of loan volume with troubled status.

Agricultural interest rates moved down again, setting new lows for the fifth quarter in a row. As of July 1, district averages for interest rates on new farm operating and real estate loans were 5.27% and 4.94%, respectively.

The district’s overall non-real-estate ag loan volumes are expected to decline in the third quarter compared with the same quarter of 2011. However, such volumes in Indiana and Wisconsin are expected to increase. For July through September, farm mortgage volumes are forecast to grow slightly more than in the same period of 2011.

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Related Video Report :

Brian Basting of Advance Trading says high land values will be dependent on two things: high commodity prices and low interest rates.



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