Farmland values in the Midwest rose 13 percent in the third quarter and jumped 24 percent in the Great Plains as record crop prices and insurance more than made up for losses from the worst drought in 56 years, according to separate surveys of bankers by the Federal Reserve.
Iowa, the biggest U.S. corn and soybean grower, saw gains of 18 percent from the same quarter in 2011, the most among the five Midwest states in a Federal Reserve Bank of Chicago report today. Nebraska, the No. 3 corn grower, saw appreciations on non-irrigated land of 30 percent, the most among seven Plains states surveyed by the Federal Reserve Bank of Kansas City.
The drought in the U.S., the world’s biggest grain and oilseed exporter, hurt crops from Ohio to Kansas. Corn and soybean futures surged to records earlier this year, and wheat to a four-year high. The gains and expectations for the highest-ever claims for crop insurance prompted the U.S. Department of Agriculture on Aug. 28 to predict farm income would rise to a record $122.2 billion this year, after previously expecting a decline.
“Many farmers are going to have their best year they have ever had,” said Loyd Brown, the president of Hertz Farm Management Inc. in Nevada, Iowa, which manages more than 500,000 acres in nine states. “There’s been an acceleration in sales, and there’s still a lot of firepower looking to buy land,” he said in a telephone interview yesterday.
Incomes for Midwest crop farmers were forecast to rise in the next six months, according to 48 percent of respondents in the Chicago Fed’s survey of 223 bankers, while 72 percent of bankers said earnings will fall for hog and cattle producers.
Midwest land values rose 5 percent from the second quarter, and 36 percent of the bankers surveyed forecast higher values in the fourth quarter. Just 1 percent of respondents expected lower prices. Illinois gained 15 percent from a year earlier, Indiana rose 11 percent, Wisconsin increased 8 percent, and Michigan advanced 7 percent. More than half of the bankers said farmers will seek to buy more land in the next six months, and 31 percent forecast improved demand from investors.
“The drought does not seem to have derailed bankers’ anticipation of further upward movement in farmland values,” David B. Oppedahl, a business economist at the Chicago Fed, said in the report. “Survey results indicated that the impetus for higher farmland values actually strengthened during the third quarter of 2012.”
An index of demand for non-real-estate loans in the district fell during the quarter compared with a year earlier, even as interest rates dropped to a record, the bank said. Repayment rates on farm loans, loan renewals and extensions improved, and loan volume was expected to increase in the fourth quarter, the survey showed. Responding bankers predicted forced sales or liquidations of farm assets among financially-stressed farmers in the region to edge down in the next three to six months.
The average interest rate on real-estate loans on Oct. 1 was 4.86 percent, according to the Fed. About 7 percent of bankers surveyed required higher collateral to qualify for loans, while 2 percent requested less.
In the Kansas City Fed report, farmland values rose 23 percent in Missouri while Kansas advanced 22 percent. Oklahoma had the smallest increase at 13 percent. Irrigated land in the region gained 22 percent, and ranch land for cattle grazing rose 14 percent from a year earlier.
Drought hurt farm income during the quarter, especially for livestock producers, boosting demand for farm operating loans, according to the Kansas City Fed’s quarterly survey of agricultural credit conditions. Bankers surveyed expect high commodity prices and crop insurance to support incomes.
“The drought did not appear to have significant impact on farmland markets in the third quarter,” bank economists Jason Henderson and Nathan Kauffmann said in the report. “Bankers indicated that demand for quality farmland outpaced supply, even with more land being put up for sale.”
The report covered the Fed’s 10th District, which includes Kansas, Nebraska, Oklahoma, Missouri and parts of Colorado, Wyoming and New Mexico. Land values rose “nearly 3 percent” from the second quarter, and about 75 percent of the bankers surveyed anticipated farmland gains would slow as prices “stabilize at high levels heading into 2013,” the economists said in the report.
Bankers surveyed expressed some concerns that the jump in feed costs may lead to a further reduction in livestock herds if grain inventories remain low and pastures remain dry, the Fed said. A government report tomorrow may show that high corn prices reduced the number of cattle in feedlots on Nov. 1 by 5.3 percent from a year earlier, a Bloomberg News survey showed.
Incomes fell during the quarter from a year earlier for the first time in two years as higher feed and fuel prices increased costs for livestock operations and drought wilted crops, boosting loan demand, according to the Kansas City Fed.
“Shrinking incomes curtailed farm spending on capital purchases,” the Kansas City Fed economists said. “Bankers reported lower capital spending compared with year-ago levels for the first time since early 2010. Capital spending was expected to remain low in the fourth quarter.”