Upper Midwest farmland values struggled over the last year, declining 3% as the average crop price decreased 21% for corn and 33% for soybeans from a year ago. Quarterly farmland values decreased during the second quarter of 2015, but bankers were confident about their outlook for farmland values in the third quarter after a positive June USDA Stocks and Acreage report. Banks reportedly began increasing interest rates combating the widening divide between declining loan repayment rates and increasing loan demand.
Farmland Values
The Seventh Federal Reserve District, which is made up of portions of Illinois Indiana, Iowa, Michigan, and Wisconsin, reported a 1% decrease in “good” farmland values during the second quarter 2015. The quarterly increases in Indiana 2% were more than offset by decreases reported in Illinois 2% and Wisconsin. Iowa farmland values were reported unchanged during the second quarter 2015.
Those surveyed reported depressed crop prices over the second quarter caused the decline in farm values. Respondents did mention that the large increase in grain prices following the release of the USDA Stocks and Acreage report at the end of the second quarter could improve farmland values during the third quarter. Speaking with farmers and realtors across the 7th District during the period, many mentioned that the quality of farmland available for sale remains marginal and the overall number of properties is below average.
Annual farmland values declined 3% from the second quarter 2014. The annual increase in Indiana 4% and Michigan 6% were more than offset by decreases reported in Illinois 6%, Iowa 7%, and Wisconsin 2. Respondents pointed to the 21% decline in corn prices and 33% decline in soybean prices since the second quarter 2014.
Credit Conditions
The credit condition in the 7th District was again mixed with some indicators showing an improved farm credit, while others areas declined during the second quarter 2015. The loan repayment index improved for the first time since the first quarter 2013. Despite increasing, the index remained below growth neutral indicating that respondents were still seeing a decrease in the number of farmers repaying loans.
The widening divide between loan repayment rates and demand for operating loans continued. This is a metric the Chicago Fed has been wary of for the past five quarters fearing that a continued widening divide could severely damage farm credit if low crop prices persist. Interest rates for non-real estate loans increased over the period, something this report had suggested would happen if loan repayment rates continued to decrease and loan demand continued to increase.
Outlook
The outlook for farmland values in the third quarter was positive. The June 30 Stocks and Acreage report was very bullish leading to large increases in corn, soybean and wheat prices. 60% of the respondents believed that farmland values would remain stable or increase through the third quarter. The increases in grain prices at the end of June were lost following the release of the August 12th, World Agriculture Supply and Demand Estimates which reported increases in corn and soybean production estimates for 2015/16. Farmland values will continue to decline as crop prices remained suppressed.
Looking out further, many farmers and bankers were confident that the agriculture sector could sustain through 2015 following the decline in farm income reported in 2014. As we now look toward 2016 some of that confidence has waned. A third consecutive bumper crop, both domestically and abroad, could further damage the farming income expectations. Interest rates have begun to adjust for the increasing loan demand and decreasing repayment rates. Further upward adjustments in interest rates for operating loans could create a difficult lending environment for farmers in 2016.
- Colvin