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Dipping land values, rising ag loan competition ahead -- survey

Jeff Caldwell 12/02/2013 @ 11:08am Multimedia Editor for Agriculture.com and Successful Farming magazine.

Three specific factors point to a softening ag financing sector, according to ag lenders in the nation's center.

The biannual audit of ag lending conditions comprising the K-State Agricultural Lender Survey, carried out by Kansas State University ag economists, shows a tipping point has come and gone between the spring survey and the fall version, the results of which were released recently. While the spring survey results reflected more optimism about the direction of the sector in general, the fall edition -- comprising input from about 500 lending institutions in 48 U.S. states -- shows reversals in three specific variables that verify the frequent speculation of the last few months that the ag sector is slowing:

  • Interest rates
  • Nonperforming loan volume
  • Land prices

"Overall, there is less longer term optimism among agricultural lenders. Land values are expected to decrease in the long-term. Interest rates are expected to increase and the spread over cost of funds is expected to increase in the long-term," according to the results of the fall survey led by Kansas State University ag economists Brady Brewer, Brian Briggeman, Allen Featherstone, and Christine Wilson. "However, nonperforming loans which are currently at low levels are expected to increase in the long run, especially in the row crops. The sentiment for the increase in non-performing loans grew stronger from the Spring to the Fall Survey. Total loan volume is expected to increase."

This is the first time the K-State survey' has delved specifically into land values as an ag lending bellwether along with others like interest rates and loan volume. And, it's a good thing this time around, as there's a distinct change underway -- one that's been noted elsewhere in farm country.

"Respondents indicated that land prices have increased in the past three months," according to the survey results. "This trend will moderate in the short run, and respondents believe land prices will start decreasing in the long run."

Survey results show respondents see slight land value growth in the next year (though ultimately reaching a plateau) before a wholesale decline in the two- to five-year time frame.

There's another key variable changing in the next few months and years that will change how farming is financed around the U.S., according to K-State's survey of ag lenders. The cost of money -- the difference between loan interest rates and rates of interest paid -- will likely lead to more competition for ag loans.

"The reason for asking about both loan interest rates and spread over cost of funds is to gauge competition in the agricultural lending market. A decrease in the spread over cost of funds suggests that competition for agricultural loans among lending institutions may be increasing," according to the survey. "Survey respondents indicated a stronger sentiment that the spread over cost of funds for the longer term would increase more in the Fall survey than in the Spring. By region, lending institutions in the Plains region felt they would face larger spread over cost of funds than those lending institutions in the Midwest region."

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