Corn Belt Land Values Slip In 2014, First Annual Drop Since ’86: Chicago Fed

The Seventh Federal Reserve District had an annual de­crease of 3 percent in “good” farmland values for 2014, marking the first yearly decline since 1986.

However, farmland values in the fourth quarter of 2014 remained largely the same as in the third quarter, according to sur­vey respondents from 224 agricultural banks across the District.

Half of the respondents expected farmland values to fall during the January through March period of 2015, while only 1 percent remained hopeful that farmland values would rise in the areas surrounding their respective banks.

Recent trends in agricultural credit conditions ex­tended into the fourth quarter of 2014. Non-real-estate loan demand relative to a year ago was again higher. Funds available for lending remained above the level of a year earlier.

The average loan-to-deposit ratio for the District climbed for the third quarter in a row, to 70.6 percent–the highest level of the past four years.

Repayment rates on non-real-estate farm loans were markedly lower in the October through December period of 2014 versus the same period of 2013, and rates of loan renewals and extensions were higher.

Average interest rates on farm operating and real estate loans had eased to near-historic lows by the end of the fourth quarter of 2014.

Farmland values

Moreover, the fourth quarter of 2014 was the first time since the third quarter of 2009 that the District suffered a year-over-year drop in farmland values. When adjusted for inflation, the District’s annual decrease in agricultural land values for 2014 was the first one since 1992; the streak of annual increases in District farmland values in real terms had reached 21 years before being broken in 2014.

Still, at the end of 2014 the index of inflation-adjusted agricultural land values for the District was 68 percent higher than at its 1979 peak from the 1970s boom (see chart 2 on next page). In the fourth quarter of 2014, Illinois, Indiana, and Iowa experienced declines in agricultural land values on a year-over-year basis; in contrast, Wisconsin experienced a modest increase, and Michigan had no change (see table and map below).

Farmland values were down in 2014, even though the District as a whole set records for both corn and soybean production. According to U.S. Department of Agriculture (USDA) data, the District’s 2014 production increased 10 percent for corn and 17 percent for soybeans from 2013.

The District’s corn yield increased 9.1 percent in 2014 from 2013, to a record-setting 184 bushels per acre. The District’s soybean yield was up 10.5 percent in 2014 from 2013, to 52.8 bushels per acre, establishing a new record as well. However, not all District states had record crop yields (Iowa and Wisconsin failed to set new state records like their District peers did).

The nation’s corn production for 2014 reached a re­cord high of 14.2 billion bushels (2.8 percent higher than the 2013 harvest). U.S. soybean production for 2014 hit a record high of 3.97 billion bushels (18 percent higher than the 2013 harvest).

Because of the plentiful supplies of corn and soybeans, downward pressure was placed on crop (and feed) prices. Corn prices in December 2014 were, on average, 14 percent lower than a year ago and 45 percent lower than two years ago. Soybean prices in December 2014 were, on average, 21 percent lower than a year ago and 28 percent lower than two years ago.

Total usage of corn at 13.6 billion bushels in the 2014-15 crop year would leave U.S. ending stocks at 1.88 billion bushels. At 13.8 per­cent, the stocks-to-use ratio for corn would be at its high­est since the 2008-09 crop year.

Total soybean usage of 3.67 billion bushels would result in ending stocks of 410 mil­lion bushels. The stocks-to-use ratio for soybeans in the 2014-15 crop year would thus increase to 11.2 percent, reaching its highest level since the 2006-07 crop year. (All of the preceding figures in this paragraph were computed from USDA data.)

Lower corn and soybean prices have been primary factors contributing to the drop in farmland values. The impact of falling crop prices has been offset to some ex­tent by buoyant returns for livestock producers through­out 2014.

Nevertheless, the index of prices for livestock and associated productswas down 5.2 percent in December from November (yet it was still up 13 percent from the previous December). The average price of milk in December was noticeably lower than the price in November, and even trailed the price from the previous December by 7 percent.

As livestock producers responded to price signals for expansion, the extra output contributed to a lowering of the prices re­ceived by producers, trimming their profits. There still seemed to be some lift to farmland values from livestock operations toward the end of 2014, yet the farm sector should be cautious about possible future impacts of these price trends, especially because feed costs may not get much (if any) lower.

Credit conditions

Agricultural credit conditions were in many ways quite different in the fourth quarter of 2014 than in the fourth quarter of 2013. In particular, demand for non-real-estate farm loans in the October through December period of 2014 was dramatically higher than in the same period of 2013.

With 48 percent of survey respondents noting an increase in the demand for non-real-estate loans and 11 percent noting a decrease, the index of loan demand jumped to 137 in the fourth quarter of 2014. This marked the highest level for the index since the second quarter of 1994 (and the second-highest reading since the third quarter of 1979).

Rising loan demand pulled up the District’s average loan-to-deposit ratio to 70.6 percent–the highest level in four years and 7.2 percentage points below the average level desired by the responding bankers.

Moreover, the index of non-real-estate farm loan repayment rates was much weaker in the fourth quarter of 2014 compared with the fourth quarter of 2013. With 5 percent of survey respondents reporting higher rates of loan repayment and 36 percent reporting lower rates, the index of repayment rates was 69 in the final quarter of 2014–its lowest level since the first quarter of 2002.

Also, 28 percent of respondents reported higher rates of loan renewals and extensions during the October through December period of 2014 versus the same period of the previous year, while only 4 percent reported lower rates. At the same time, credit quality eroded a bit: 2.9 percent of the District’s farm loan portfolio was reported as having “major” or “severe” repayment problems in the fourth quarter of 2014–which was half of a percentage point higher than a year ago.

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Photo: Debra L Ferguson, AgFax Media

Photo: Debra L Ferguson, AgFax Media


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