3 Reasons Farmland Values Could Head South
Compared to last year, farmland values have increased, but several signs point to a moderation or slight decline in values.
For the past few years, farmland values have been on a constant incline. Farmers can expect their land to continue to hold value, but most bankers expect values to soon plateau, according to reports from three Federal Reserve Banks.
In the Midwest, the Federal Reserve Bank of Chicago reports that unfavorable weather conditions are lessening the value of farmland. on an annual basis, farmland values in the Seventh Federal Reserve District gained 14% for the period ending Sept. 30. "Good" agricultural land values in the five states (northern Illinois, the majority of Indiana, Iowa, southern Michigan and southern Wisconsin) showed only a 1% quarterly increase.
The Federal Reserve Bank of Kansas City (which covers Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri) says non-irrigated cropland values rose 19% compared to a year earlier. Irrigated cropland rose 21.5% and ranchland values saw an annual gain of 15% in the Tenth Federal Reserve District.
In the Eighth District (which includes Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee), The Federal Reserve Bank of St. Louis reports values for quality farmland saw a decrease of 6% from the second-quarter average. Yet on an annual basis, quality-farmland values remain 9.1% higher than at the same point last year.
While farmland values are still posting gains, many experts expect those double-digit jumps to soon end.
Here are three reasons that may be the case:
LOWER GRAIN PRICES
Grain prices tend to cycle, from high-profit periods to low-profit periods. Gary Schnitkey, University of Illinois ag economist, says corn prices have averaged $4.77 between 2006 and 2012. This level of prices is likely a new plateau, compared to where corn prices averaged before 2006.
But, that doesn’t mean prices couldn’t still recede. "If we have a good crop in 2014, we may be looking at low $4 corn or even below $4 corn," he says.
LOWER NET CASH INCOME
With lower grain prices on the horizon, Joe Glauber, USDA chief economist, says farmers will likely see lower net cash income – a major driver in farmland values. "Assuming some drop in net cash income, the implications are for a softening of real estate prices," he says.
Net cash farm earnings for crop and livestock operations were expected to move in opposite directions, according to a recent AgLetter, written by David Oppedahl, Federal Reserve Bank of Chicago senior business economist. "Crop farmers faced the prospects of lower levels of net cash earnings this fall and winter relative to the previous fall and winter, as only 12% of survey respondents anticipated net cash earnings from crops to rise and 73% expected them to drop.
Reduced feed costs have been a boon for hog, cattle, and dairy farmers. Around 37% of the 195 agricultural bankers surveyed in the Seventh Federal Reserve District expect higher net earnings for cattle and hog operations over the next three to six months relative to a year ago.
LESS LAND FOR SALE
Even with lower farm income, demand is still high for good-quality farmland. The 210 bankers surveyed in the Tenth Federal Reserve District reported that the demand for high-quality farmland outpaced supply as fewer farms were for sale during the growing season.
Similar circumstances were seen in the heart of the Corn Belt. Oppedahl reports that in the Seventh Federal Reserve District, survey respondents predicted farmers’ demand to acquire farmland this fall and winter to be stronger than a year ago, whereas they expected the opposite for nonfarm investors’ demand. Thirty-six percent of the responding bankers predicted a decrease in the volume of farmland transfers relative to the fall and winter of a year ago, while 18% expected an increase.
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