Survey Finds Slight Farm Value Rise

June 17, 2002
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CHICAGO — A report by the senior economist of the Seventh Federal Reserve District indicates farmland prices increased a little more rapidly in the first quarter of 2002 than has been the case since mid-1998.

Based on the Chicago Fed’s end-of-first-quarter Land Value and Credit Conditions Survey, Jack Hervey reports that prices for what he termed “good” farmland rose, on average, a little less than 3 percent between Jan. 1 and April 1.

The district encompasses Michigan, Indiana, Illinois, Iowa and Wisconsin.

According to Hervey, data from 381 agricultural bankers also indicated farmland prices on average rose nearly 6 percent relative to a year ago, in contrast to 4 percent the preceding year.

The survey also indicated some deterioration in credit conditions, he said, while bankers also noted increased demand for farm loans. Too, the recent decline in interest rates was reported to have bottomed out.

The survey showed the hike of almost 3 percent district farmland value in the first quarter was the largest quarterly gain in five years. The economist said it was also the first quarter in two years where all the district’s five states recorded increased farmland values.

He advised that 30 percent of bankers surveyed reported that the amount of farmland up for sale was higher than a year ago in contrast to 34 percent last year. Meanwhile, Hervey indicated demand for farmland was up, with 36 percent of the bankers noting increased demand as compared with 24 percent in 2001.

The survey’s respondents continued to report strong demand for farmland to be converted to non-farm purposes. The survey indicated bankers also noted that demand for land by other farmers increasingly came from IRS Section 1031 tax-deferred exchanges.

A 1031 exchange allows a farmer with high-value land lying in an urban fringe favorable to a non-farm development to sell such land and purchase a more remote parcel.

The key to these transactions is the deferral of tax on capital gains derived from the sale of urban fringe farms. Hervey reports some bankers say such transactions helped raise farmland prices in outlying areas.

An increase in cash rents for farmland reflected the higher market prices reported, although rents increased more slowly than did sale prices — on average, about 2 percent from a year ago.

Cash rental arrangement accounted for 72 percent of the farmland rental contracts according to respondents; about 25 percent of rental arrangements were on a share crop basis.

In addition to questions about land values and credit conditions, the survey asked bankers to comment on concerns about production agriculture in their respective service areas. Hervey reports that during the past two to three years a recurring theme in these responses has focused on three components of one issue: farm income.

** First, the negative impact of low commodity prices on farmers’ financial statements.

** Second, what farmers view as the critical role the federal farm program plays in keeping many of their operations financially viable.

** Third, many farmers continue to operate by drawing down their equity base to finance operations, making them more susceptible to financial stress and increasingly dependent on agricultural subsidies. The value of farmland is a major portion of that equity base.

Herveyobserved that in 2000, after 19 years, district farmland values had matched their previous high, but he cautioned that this fact may not be favorable to the industry.

He explained that compared to the 1981 price peak, the end-of-2001 average was up only 11 percent (about 0.5 percent per year, on average). This compares poorly with the real change in farmland prices measured against the real change in an alternative measure of equity investment such as Standard & Poor’s index of stock value of 500 major industrial firms.

He wrote that this comparison raises the question of risk associated with key farm assets whose values have not kept pace with inflation over a substantial period of time.

For example, between fourth quarter of 1979 and the end of 2001, average real farmland values in the district declined 49 percent. In the past 30 years, the real decline was 14 percent. Since the most recent trough in farmland prices, 1986, the annual average price appreciation was about 2.4 percent.

All told, Hervey wrote, inflation-adjusted appreciation of an investment in S&P 500 index industries substantially exceeded a comparable investment in average district farmland.

With respect to deteriorating agricultural credit conditions for the first quarter, less than 4 percent of the respondents indicated that the rate of loan repayment increased (relative to a year ago) while 38 percent noted a lower rate of loan repayment.

Both responses represented deterioration in the rate of loan repayment relative to the fourth quarter of last year. Bankers also said the rate of request for loan renewals or extensions rose, with 39 percent of the bankers noting an increase, while only 6 percent reported a reduction.

Bankers’ concerns regarding creditworthiness were reflected in additional requirements to secure loans. The proportion of respondents reporting higher collateral requirements increased from 24 percent in the final quarter of 2001 to 31 percent in the first quarter of 2002, the highest proportion of bankers reporting increased collateral requirements since the third-quarter of 1987.

Higher loan demand was reported by a larger proportion of bankers than was the case in the two previous surveys. However, 55 percent of the respondents noted that demand remained.

Recent declines in farm interest rates virtually halted in the first quarter of 2002. By contrast, during 2001 the average quarterly decline reported in operating loan rates was 63 basis points.

Looking forward, surveyed bankers reported they expect demand for non-real-estate farm lending to increase in the second quarter of 2002, relative to a year ago. They also still expect the increase to be concentrated in operating loans, with 40 percent of the respondents expecting an increase in this category. Demand for category-specific lending for feeder cattle, grain storage construction and farm machinery loans remained weak with a substantially larger proportion of the bankers expecting decreased loans than those who expect increases.

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