David Oppedahl, Federal Reserve Bank of Chicago  |   November 16, 2012 resize text

Although the drought’s effects on the Seventh Federal Reserve District lingered, the year-over-year increase in agricultural land values only eased to 13 percent in the third quarter of 2012. In addition, there was a quarterly gain of 5 percent in the value of “good” farmland—actually much larger than the increase of the previous quarter.

According to the 223 banker responses provided for the Oct. 1 survey, the district’s agricultural land values were expected to continue rising in the fourth quarter of 2012.

The drought’s impact was evident in credit conditions for the agricultural sector in the July through September period of this year compared with the same period of 2011, even though the changes were subtle. Relative to a year ago, demand for non-real-estate loans was lower during the third quarter of 2012, but not as much as it was during the second quarter. Also, at 67.5 percent for the district, the average loan-to-deposit ratio was lower than a year ago. Compared with a year earlier, repayment rates, as well as the rates of loan renewals and extensions, for non-real-estate farm loans improved in the third quarter of 2012, but not by as much as in the second quarter of this year.

Funds availability relative to the prior year eased in the third quarter of 2012 from its historic high of the previous quarter. Interest rates on farm operating and real estate loans edged down again in the third quarter, setting records once more.

For the third quarter of 2012, the year-over-year gain in district agricultural land values of Iowa, Wisconsin, Michigan, Norther Illinois and Northern Indiana was 13 percent—the smallest increase since 2010. Iowa’s farmland values continued to lead the district, with a year-over-year increase of 18 percent for the third quarter of 2012 . The quarterly increase in the district’s agricultural land values was 5 percent for the third quarter of 2012—much higher than the 1 percent gain for the previous quarter.

Survey results indicated that the impetus for higher farmland values actually strengthened during the third quarter of 2012. Given that 36 percent of the survey respondents expected higher agricultural land values in the October through December period of 2012 and just 1 percent expected lower values, the drought does not seem to have derailed bankers’ anticipation of further upward movement in farmland values. Moreover, the demand to acquire farmland this fall and winter was not anticipated to ebb, particularly among farmers.

Given that 57 percent of surveyed bankers predicted increased demand for farmland among farmers over the next three to six months and only 5 percent predicted decreased demand, there should continue to be a lot of interest in available agricultural ground. The high level of interest in farmland should also persist on account of the sustained strong demand among nonfarm investors; 31 percent of the survey respondents forecasted greater demand to buy farmland among nonfarm investors over the next three to six months, while 17 percent forecasted lesser demand. In addition, 45 percent of the responding bankers expected farmland transfers to grow in volume this fall and winter relative to the previous fall and winter, while 8 percent expected them to decline.

According to the survey responses, the drought was predicted to more adversely affect the net farm earnings of livestock farm operators than those of crop famers. Crop farmers were actually forecasted to experience higher levels of net cash earnings this fall and winter relative to the previous fall and winter; however, dairy, cattle and hog producers were forecasted to have lower levels.

Because of higher corn and soybean prices this fall and payouts from crop insurance to cover lost output, 48 percent of survey respondents anticipated net cash earnings from crops to rise over the next three to six months and 24 percent anticipated these earnings to fall.

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