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Farmland value surge rolls on -- Fed survey

Jeff Caldwell 05/15/2012 @ 2:31pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

Farmland values are enticing more landowners to cash in and put more acres up for sale, but the growing inventory for sale has yet to slow the market's upward scream, according to the results of a recent survey.

In its quarterly report of ag credit conditions, the Federal Reserve Bank of Kansas City shows that, in the first quarter of 2012, farmland values continued to trend sharply higher, with few signs that the trend is reversing anytime soon. That has enticed more landowners to place more land on the market in an effort to capture some of the rising profit potential from land sales, says Federal Reserve Bank Omaha Branch Executive Jason Henderson.

"Despite larger supplies, buyers remained willing to pay record prices at land auctions," Henderson says. "District farmland values climbed higher in the first three months of 2012, posting sharp quarterly gains. Compared with the fourth quarter of 2011, the value of nonirrigated and irrigated cropland in the District surged by 8% and 9%, respectively. Ranchland values also shot up in the first quarter, appreciating more than 7% since the end of last year."

It's a sign of ongoing healthy credit conditions overall in the nation's midsection, from Colorado and Wyoming to Missouri and Nebraska to Oklahoma. Ag lenders said in the Fed's survey that farm loan demand dipped and farmers paid down more debt and used cash for operating expenses.

"Strong farm income lessened the need for debt financing and cut loan demand at agricultural banks. The index of farm loan demand fell to its lowest level since the late 1980s. Sluggish loan demand, however, did not indicate a slowdown in farm sector spending," Henderson says. "According to survey respondents, farm income gains and high levels of liquidity spurred additional household and capital spending in the first quarter."

Loan demand has actually declined far enough that the Fed's funds availability index hit a new high in the first quarter of 2012, with fewer than 1% of the ag lenders responding to the survey saying their banks' funds available were lower than the previous quarter. Between the rise in available funds and continued basement-level interest rates, many lenders told the Fed they had eased collateral requirements for farm loans, Henderson says.

"With high levels of liquidity in the farm sector, District bankers reported that buyers were increasing the use of cash payments and equity to finance farmland purchases. In early 2011, survey respondents indicated new debt was being used to finance slightly more than half of the purchase price of new farmland sales," he says. "In the first quarter of 2012, bankers reported higher cash down payments and greater use of pledged equity from existing real estate holdings had lowered the share of new debt financing on new real estate purchases to 47%."

Looking ahead, even barring the eventually inevitable rise in interest rates, current strong farm returns will likely stay that way for at least the next quarter, Henderson said, based on the sentiments of the ag lenders surveyed in the latest Fed report.

"Survey respondents did not expect the farmland market to cool in the near future," Henderson says. "About a third of District bankers anticipated farmland values would rise further while the remaining respondents expected farmland values to hold at peak levels."

   

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