Taking the financial temperature of the heart of the Cornbelt
In the heart of the Cornbelt, land prices continue to increase, and farmers are not only paying cash for farmland, but also paying off non-real estate debt. As the 2012 farming year comes to an end that is the financial health of agriculture in Iowa, the northern two-thirds of Illinois and Indiana, and the agricultural portions of Wisconsin and Michigan. Those areas make up the Chicago Federal Reserve District and the positive news comes amidst the region’s recovery from the worst drought in a half century.
The Chicago Fed’s quarterly agricultural letter, authored by David Oppedahl, says his survey of commercial bankers in the district found that year over year gains in land values was 13 percent. While that is significant, it is the smallest such increase since 2010, meaning the rate of increase is slowing. However, that is the district-wide average, which is less than the 18 percent average increase for the state of Iowa, and the 15 percent average for Illinois.
Of the bankers responding to the Fed survey, 36 percent expect land values to increase, and only 1 percent expects a decrease. And 57 percent of the bankers predict increased demand for land by farmers in the coming 3-6 months. Oppedahl said 31 percent of the bankers believe there will be stronger interest for farmland among non-farming investors. The Fed economist said the calculations of the USDA’s Economics Research Service said while livestock producers had a bleaker financial outlook, it was much brighter for crop producers, and when inflation adjustments were made, net farm income would reach its highest level since 1973. He added, “Strong earnings for crop producers this year, especially following the high earnings of 2011, should help set the stage for continuing growth in farmland values.”
The money for farmers to buy high priced farmland will be coming from net cash income from crop producers, who the bankers say will be earning more than they did last fall and winter, as well as the prior year, primarily due to crop insurance payments. In fact nearly half of the bankers reported that net cash earning from crop production will rise in the next 3-6 months. The bankers in the Chicago Fed district reported a corn yield 25 percent below 2011 and a soybean yield 11 percent below 2011. Resulting higher grain prices have caused higher prices for livestock feed, and 72 percent of the bankers expect lower earnings for livestock producers.
Even though land values increased substantially during the dry period of the past year and a half, credit conditions did reflect the impact of the drought, says Oppedahl. That was depicted by the more difficult financial situation for livestock producers, and Oppedahl says that manifest itself in the July through September quarter. In the second quarter, requests for non-real estate loans plunged, but the third quarter recorded more demand. Oppedahl says there was a surge of loan demand in Wisconsin, “presumably to meet the needs of the dairy industry.” And he noted, “For the third quarter of 2012, the District’s average loan-to-deposit ratio was 67.5 percent, which was over 10 percent below the level desired by survey respondents.”
While that financial ratio indicated some financial squeeze, 32 percent of the bankers told the Fed that farmers were repaying non-real estate loans at a better rate than they were a year ago. Only 4 percent noted a lower repayment rate. Additionally, the rate of loan renewals and extensions of loans decreased, compared to year-earlier data.
Interest rates continued to be at historically low levels reported Oppedahl. He said, “As of Oct. 1, 2012, the average interest rates on agricultural operating loans and real estate loans were 5.21 percent and 4.86 percent, respectively. Both values were new record lows for the District. Illinois had the lowest average interest rates for both kinds of loans, while Wisconsin had the highest.” There was a slight bump upward with 7 percent of the bankers indicating that borrowers needed more collateral to qualify for loans.
The drought in the Cornbelt states of Iowa, Illinois, and Indiana cut crop production, but because of crop insurance the financial strength of crop producers remains strong, and stronger than livestock producers, who may be seeking more loan assistance. Land values remain at a high level, with prices and demand both rising; however, the rate of price increases may be slowing. Interest rates remain at historically low levels and that will foster continued increases in land values, if buyers do finance some of their purchase.