Regional land values are a mixed bag, but unless there’s a fourth-quarter comeback, Federal Reserve bankers have widespread farm income and credit worries.
Chicago: Land values continue mostly downward trend
Third-quarter 2016 farmland values in the Federal Reserve Bank of Chicago district remained on a mostly downward trend, although year-over-year values increased slightly in Indiana and Wisconsin. David Oppedahl, business economist, summarized land values and credit conditions in the Chicago bank’s latest AgLetter. The district covers all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin.
Districtwide, it marked the fourth straight quarter of year-over-year farmland value declines—the first time for such a streak since 1986–87. The sharp decline in Michigan may be related to poor growing season weather, compared with nearly ideal conditions and record corn and soybean yields in the rest of the district.
Only 1 percent of survey respondents expected farmland values to rise during the fourth quarter of 2016, while 58 percent expected them to move lower. Farm lenders forecasted weaker farm and non-farm demand for farmland this fall and winter compared with a year ago. A lack of available properties for sale may be playing a role in keeping farmland values from dropping faster.
Quarterly average interest rates on variable-rate farm loans were the lowest of 2016. Interest rates on operating and feeder cattle loans moved lower in the third quarter of 2016, but rates for agricultural real estate were unchanged.
Ag credit conditions deteriorated once more, yet not all indicators were negative. Repayment rates for non-real-estate farm loans were down, and loan renewals and extensions were up. Demand for non-real-estate loans was a bit more pronounced than in the prior quarter. Loan collateral requirements tightened relative to the third quarter of the previous year.
With lower prices, livestock and dairy operators faced a tougher environment during the quarter, falling short of production costs. Compared with a year ago, cattle prices were down 21 percent, while milk prices were down 0.8 percent. Survey respondents expected both crop and livestock operations to struggle in terms of net cash farm earnings this fall and winter, a second year in a row with a negative outlook.
Nearly two-thirds of survey respondents anticipated forced sales or liquidations of farm assets among financially distressed farmers would increase in the next three to six months relative to a year earlier.
Dallas: Land values mostly higher
Third-quarter 2016 changes in land values varied but were mostly higher in the Federal Reserve Bank of Dallas district, covering all or portions of Texas, New Mexico and Louisiana.
Irrigated land values rose the most, up 7.2 percent over the previous quarter. Ranchland values were up 6.5 percent, and dryland values were up 5.6 percent. Ranchland and dryland values also increased year over year, while irrigated land values were mostly unchanged from a year earlier.
Across all land types, strongest gains were in the low plains, northcentral and central Texas. Cropland value weakness was seen in the high plains of Texas and northern Louisiana. Survey respondents expect farmland values to trend down in the upcoming months, citing poor crop production, low commodity prices and concern about the economy.
Fixed-rate and variable-rate loan interest rates were mostly lower, with rates on long-term real estate loans the only exception.
Loan renewals and extensions continued to increase as loan repayment rates continued to decline. Credit standards continued to tighten. Compared to a year earlier, demand for operating loans continued to increase. All other loan categories fell in volume.
Kansas City: Farm debt on the rise
Low commodity prices continued to weigh on farm sector profits, credit conditions and farmland values in the Federal Reserve Bank of Kansas district. The region covers Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.
The value of each type of farmland—nonirrigated cropland, irrigated cropland and ranchland—fell more than 6 percent from a year ago, with sharpest declines in Kansas, Nebraska and Oklahoma. It was the sharpest year-over-year reduction in the value of each type of farmland since the mid-1980s, noted report authors Nathan Kauffman and Matt Clark. Exceptions to declines were the value of nonirrigated cropland in western Missouri and irrigated cropland in Mountain States.
Similar to farmland values, cash rental rates for both cropland and ranchland decreased in the third quarter. Cash rent for both irrigated and nonirrigated cropland was down nearly 10 percent from a year ago.
Although variable interest rates for operating, machinery and farm real estate loans generally remained low, each increased in the third quarter. Fixed interest rates for machinery loans also rose, whereas fixed interest rates for operating loans edged lower; interest rates for farm real estate loans were mostly steady.
Reduced farm income has continued to weaken credit conditions and increase outstanding farm debt. Demand for farm loans, as well as renewals and extensions, increased in the third quarter. Operating loans as a percentage of total loans is on the rise. Loan repayment rates declined.
Although defaults on farm loans remain low, survey respondents reported an increase in the number of farm borrowers on their “watch list” and a notable increase in the amount of collateral required to obtain farm loans. In many cases, agricultural lenders increasingly have relied on farm borrowers’ real estate as a source of collateral for other agricultural loans.The decline in farm income has taken a bigger bite out of farm borrowers’ working capital and could result in some borrowers becoming more highly leveraged as they continue to try to support operations through short-term financing. Capital and household spending continued to decrease.
St. Louis: Land values steady, but cash rents lower
Despite continuing pressures from lower farm incomes, third-quarter 2016 farmland values were steady to slightly higher in the area covered by the Federal Reserve Bank of St. Louis. The district covers all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Cash rents for both quality farmland and ranch or pastureland declined modestly in the quarter. More bankers expect land values and cash rental rates to decline over the final quarter of 2016.
Interest rates on fixed-rate operating loans were unchanged in the third quarter, while rates on fixed-rate loans for machinery and other intermediate-term investments fell. In contrast, interest rates on fixed-rate farm real estate loans rose.
For variable-rate loans, rates fell modestly for operating loans, but increased slightly for machinery and other intermediate-term investments and farm real estate loans.
More bankers continue to report that falling farm income is pressuring farmers to trim their household expenditures and farming- and ranching-related capital outlays.
With lower incomes, loan demand was up and loan repayment rates were slower, especially for operating lines of credit. More than half of bankers reported that operating loans were expected to have the largest repayment problems going forward. A little more than half of the survey respondents said farmers will be required to provide additional collateral to cover the unpaid portion of their operating line of credit. 
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Dave Natzke
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