More farmland is being purchased with debt-financing
Farmers are buying more land. While that may not be a surprise, they are not only using cash, but have increased their borrowing from lenders to finance the purchases. The trend toward increased debt is indicated by the recent reports on agriculture from the Chicago and St. Louis Federal Reserve Banks.
The Chicago Fed includes Iowa, the northern two-thirds of Illinois and Indiana, as well as Michigan, and the agricultural area of Wisconsin. The St. Louis Fed includes the balance of Illinois, Indiana, Western Kentucky and Tennessee, Arkansas, Eastern Missouri, and northern Mississippi. Subsequently, farmers from the Great Lakes to the Mississippi River Delta are incurring debt, while crop insurance provides some level of comfort, and while they enter another year of weather uncertainty.
The Chicago Fed Agricultural Letter and the St. Louis Fed Agricultural Finance Monitor are both compiled from surveys and interviews with commercial bankers in the districts who were reporting on land values, credit conditions, and land financing practices.
St. Louis District
The St. Louis survey specifically found that farm income and spending were equal to or higher than year earlier levels in most of the district. But it noted that levels were particularly higher in the southern part of the district because high yields also combined with high prices. The bankers also cited high levels of indemnity payments from crop insurance provided additional capital.
While loan demand in the Memphis sector is 150% of the fourth quarter of 2011, loan demand is slightly less than 2011 fourth quarter numbers in the balance of the district. The bankers are expecting greater loan demand in the first quarter of 2013 compared to year earlier demand, quantified as 125% of what was expected a year ago.
Whether farmers in the St. Louis District were paying cash or financing a large portion of their land purchases, the bankers reported that 73% of land purchases were made by farmers and 94% of land purchases, whether by farmers or non-farmers, were prompted by an investment opportunity. Across the district, 14% of the purchase was made by cash, 39% involved commercial bank financing, 45% involved Farm Credit System financing, and 2% by insurance companies.
In the Chicago Fed District, where farmland values have risen 52% over the period of 2010-2012, bankers told the Fed they anticipate an expansion in the volume of farm real estate loans. Of the bankers surveyed, 43% anticipated higher levels of land purchases in 2013 than in 2012, with 7 of 10 anticipating steady values in the first quarter of 2013. Fed economist David Oppedahl says, “And although the District’s annual increase of 16% in the value of “good” farmland for 2012 was a little lower than that for 2011, it was still the third-largest increase since the late 1970s.”
The Chicago Fed commercial bankers reported a loan demand for both real estate and non-real estate loans to be 96% of average for the fourth quarter of 2012, up from 87% one year earlier. The fact that real estate loan interest rates were 4.70% and dropping provided the impetus for use of commercial loans for financing land purchases. Despite the lower interest, 20% of the banks indicated they were tightening credit standards for anyone seeking an agricultural loan. Ten percent of the lenders wanted larger amounts of collateral.
Land values are going up, farmers are buying more land than non-farm investors, but they are also financing many of the land purchases in addition to paying cash. This trend stretches from the Great Lakes to the Mississippi Delta, and includes the heart of the Cornbelt. The additional debt is being incurred while many farmers are enjoying higher income, but also during a time of future concerns about the weather and farm productivity.
Source: FarmGate blog