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August 28, 2013 8:30 am  •   By Jane Fyksen Crops Editor Is the party coming to an end? That is the question raised by the Federal Reserve Bank of Chicago’s August farmland values and credit conditions report. Even though for second-quarter 2013, “good” farmland was up 17 percent from a year ago in the Seventh District, which includes three-fourths of Wisconsin, ag land values registered no gain in the second quarter relative to the first quarter this year, according to 211 ag bankers in the district. “The last time there was no quarterly increase in agricultural land values was in 2009,” says David Oppedahl, business economist with the Chicago Reserve. “Generally, the stellar year-over-year gains in farmland values across the five district states masked the comparative weakness of the quarterly results.” Further, Oppedahl reports that the percentage of ag bankers in this quarterly survey anticipating farmland values to fall during the present third quarter (July-September) is the same as those predicting land value to rise (both 7 percent). Eighty-six percent think farmland values will be stable in the third quarter. As noted, the Seventh District’s survey of ag bankers includes three-quarters of the state, generally all but the northwest section. From July 1, 2012, to July 1, 2013, they saw land values in Wisconsin up 7 percent, 6 percent in the more southeasterly counties, 11 percent in the more central portion of the state and 16 percent in the southwest, which is generally included with northeast Iowa in the survey; however, in the second quarter (April 1 to July 1, 2013), ag bankers say the value of “good” farmland in Wisconsin only rose 1 percent. That is based on a 6 percent rise across the state’s midsection, but a 3 percent drop in southeastern and eastern counties up along Lake Michigan. Southwestern counties, lumped in with northeast Iowa, saw a 2 percent second-quarter hike. Year-to-year changes and second-quarter 2013 changes, respectively, for other district states are as follows Illinois (the northern two-thirds), up 17 percent, down 1 percent; Indiana (up 21 percent, up 5 percent); Iowa, up 18 percent, unchanged in recent months; and Michigan, up 18 percent, down 7 percent. Oppedahl highlights the second-quarter pause in what is been a rapid rise in farmland values in recent years, and he points to the quarterly decreases in ag land values in Illinois and Michigan. While farmland values on a year-over-year basis “still appear to be soaring,” he notes that “changes in farmland values on a quarterly basis may be presaging shifts in the year-over-year pattern in the latter half of 2013.” The year-over-year increase in farmland values for the second quarter was larger than that for the previous one – 17 percent versus 15 percent reported in June. Ag bankers, like producers, are seeing key crop prices starting to slide, and wondering if land values With larger harvests anticipated this fall to bolster crop supplies, USDA estimates price intervals for the 2013-2014 crop-year of $4.50 to $5.30 a bushel for corn and $10.35 to $12.35 for soybeans. “Given these price ranges, the district’s 2013 corn and soybean harvests would be lower in value compared with its 2012 harvests,” notes Oppedahl. While some of the lost revenue will be recouped via crop insurance payments for prevented plantings and revenue protection policies, this Federal Reserve economist cautions that “the anticipation of lower crop revenues – especially combined with potentially rising interest rates on farm loans – portended softness in future farmland values.” As for credit conditions in the district, he reports they were generally better in the second quarter than a year earlier. Ag bankers had more funds for lending, and repayments rates for non-real-estate farm loans were higher than a year ago. Ninety-four percent of responding bankers said their ag loan portfolios were having no significant repayment problems during April, May and June, and they perceived non-real-estate loan demand for the period to be below what it was during the same three months last year. Interest rates on farm loans rose in the second quarter for the first time since early 2011. That followed record-low rates in the previous quarter. As of July 1, district averages for interest rates on new farm operating loans and real estate loans were 4.94 percent and 4.65 percent, respectively, both lower than a year ago. “The uptick in interest rates on farm loans may mark an important shift in the district’s agricultural credit conditions,” Oppedahl warns. “Demand for non-real-estate loans relative to a year ago fell during the second quarter of 2013, but not as sharply as it did during the first quarter,” says Oppedahl. “With 17 percent of survey respondents reporting higher demand for non-real-estate loans compared with a year ago, and 30 percent reporting lower, the index of loan demand was 97 for the second quarter of 2013 – higher than its reading of 67 for the first quarter. Moreover, in the first six months of 2013, the amount of farm operating loans generated by banks was lower-than-typical, whereas the amount of farm mortgages was higher than typical.” Given such low demand for non-real-estate farm loans, it’s “not surprising,” he notes, that the district’s average loan-to-deposit ratio remained quite low at 64.5 percent – “well below the ratio desired by responding bankers (77.2 percent).” Bankers anticipate operating loans and livestock loans to shrink in this third quarter, relative to July-September last year; however, falling crop prices should bring some relief to livestock producers, who have suffered in recent years with high feed prices, Oppedahl says. Continue reading →