Stronger Farmland Values Support Farm Economy
Farmland values increased slightly in the fourth quarter, and cash rents remained stable. Nonirrigated farmland values trended higher at a modest pace in 2019 and increased 4 percent in the fourth quarter (Chart 1). Cash rents have trended lower since 2017 but increased slightly at the end of 2019. In the fourth quarter, cash rents were 2 percent above year-ago levels.
Lower interest rates and reduced borrowing costs may have contributed to recent strength in District farmland values. Interest rates declined 10 basis points in the third quarter of 2019 compared with the previous year (Chart 2). In the fourth quarter, fixed and variable interest rates for loans to finance farmland purchases declined 42 basis points from the previous year.
Demand for farmland remained strong in the fourth quarter, which also could have supported farmland values. The share of farmland purchased by farmers since 2014 has declined from 81 percent to 74 percent but remains elevated by historical standards (Chart 3). In addition to the slow pace of decline, farmers have continued to purchase a majority of farmland sold in the District.
In addition, strong demand and lower interest rates may have contributed to higher expectations for farmland values in 2020. For the first time since 2014, more bankers expected farmland values either to remain steady or increase compared with those that expected farmland values to decline (Chart 4). Although 37 percent of bankers expected farmland values to decline somewhat, half expected no change, and 14 percent expected farmland values to increase moderately in 2020.
However, some risks remained in the outlook for farmland values, as the volume of farmland sales in the District increased for the first time in several years. The volume of farmland sales increased or remained the same in all states in 2019 (Chart 5). Throughout the downturn in the Tenth District farm economy over the past six years, a persistently low volume of land sales has contributed to the stability of farmland values. However, additional increases in sales could put some downward pressure on values moving forward.
Furthermore, although farmland values have been stable for the District overall, regional disparities have persisted. For example, values for nonirrigated cropland and ranchland grew at a faster pace in the east from 2009 to 2014 (see Map for explanation of geography). In the fourth quarter of 2019, values for nonirrigated cropland and ranchland increased in the eastern portion of the District, while values in the west declined slightly (Chart 6). Several factors, including land quality and proximity to urban areas, could contribute to higher farmland values in the eastern portion of the Tenth District.1 However, relative weakness in farmland values in the west could indicate that these areas are more susceptible to financial stress if the agricultural economy weakens further.
Agricultural credit conditions throughout the District remained relatively weak through year-end, but the pace of deterioration slowed. About a quarter of all bankers continued to report a decline in repayment rates, but it was the lowest share in more than four years (Chart 7). Loan renewals and extensions continued to increase, but also at a slower pace and collateral requirements followed a similar trend. Looking ahead to the coming months, conditions were expected to weaken at a similar rate.
Demand for farm loans remained high across the region, but grew at a slower pace than previous years. Alongside slower growth in loan demand, availability of funds at agricultural banks increased in the fourth quarter (Chart 8). Looking forward, funds at farm banks were expected to increase at a similar pace while loan demand was expected to pick back up to a rate similar to recent years.
Alongside slower deterioration in other credit indicators, farm income also decreased at a slower pace. About 40 percent of bankers indicated that farm income declined from a year ago, but that was the lowest share since 2014 (Chart 9). Government payments (Market Facilitation Program) connected to trade disputes provided financial support to many producers in 2019. However, farm income in the District remained relatively weak alongside generally low agricultural commodity prices and subdued farm revenues.
Similar to farm real estate values in the District, some measures of credit conditions varied across geographic area. Farm loan repayment rates decreased at a pace similar to previous years in the west, but appeared to stabilize in the east (Chart 10). The pace of growth in demand for lending slowed slightly in both regions, but similar to previous years, remained slightly lower in the west.
A slower decline in farm income across the District on average was driven by a notably slower pace of decline in the eastern portion of the region. Similar to farm loan repayment rates, farm income was comparably weaker in the west during the fourth quarter (Chart 11). Farm income declined at a pace similar to previous years in the west, but appeared to strengthen slightly in the east.
In addition to differences across geography, credit conditions of young and beginning operators were relatively weaker than other farmers in 2019. Less-established producers continued to face a comparatively higher degree of financial stress, and the disparities have increased slightly in recent years (Chart 12). Loan demand among those borrowers was slightly higher, while loan repayment was slower and lenders required higher amounts of collateral. Those producers also were more highly leveraged, had weaker cash flow and purchased less farmland.
In the fourth quarter, farmland values strengthened, providing some stability for the Tenth District farm economy. Reduced borrowing costs and strong demand may have contributed to recent strength in land values. Although farm income and credit conditions remained weak, most indicators appeared to stabilize. Some bankers commented on the positive support from trade relief payments, but a larger share of bankers expressed concerns about persistently low commodity prices. In addition to the future path of agricultural prices, the outlook for agricultural credit conditions through 2020 also may depend on prospects of additional support from government payments.
1For more information on farmland values in the Tenth District, see this article.
Related: Read comments from bankers across the Tenth District or visit Ag and the Economy for additional research on the agricultural economy.
The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.