Land market keeps farm credit solid
Surging farm land values in the nation's midsection haven't slowed down, and that's been good for ag lenders in the last year, according to a report released Wednesday by the Federal Reserve Bank of Kansas City.
Ag banks rode the tide of relatively high commodity prices and farm land values to strong loan portfolios with higher liquidity and surging returns on assets in 2011, according to the report by Jason Henderson, Omaha Fed branch executive and associate economist Maria Akers. Though there are several factors behind the boom, land values stand head-and-shoulders above the rest in terms of influence to the ag lending sector's solid footing.
"Cropland values across the Corn Belt and northern Plains soared to all-time highs with many states posting annual value gains between 20% and 40%. In addition, ranchland values rose sharply compared to last year as high feed costs boosted demand for prime pasture ground," Henderson says. "Even drought-stricken areas of the southern Plains posted modest farmland value gains as crop insurance payments and land lease revenues from mineral rights underpinned incomes. Brisk bidding at farmland auctions kept prices high and enticed landowners to place their land holdings up for sale."
The most notable change in the ag lending sector in the last year was the loan-to-deposit ratio; it spent the year in a nosedive to wind up at the lowest it had been in 10 year, Henderson says. That translated to a softening in the demand for operating and livestock loans.
"the average rate of return on equity at agricultural banks rose to 7% in the third quarter, more than double the 3.2% reported for other small banks," says Henderson. "With stronger profits, average capital
ratios at both agricultural banks and other small banks marched higher. The average loan-to-deposit ratio at agricultural banks, however, fell to a 10-year low, a consequence of weak loan originations and strong cash positions in the farm sector."
The downward trend in farm loan delinquency continued through the year last year, ending at 3.5%. Henderson says early in 2012, that should fall below the recent low set in 2006.
Looking ahead, Henderson says the number of farms on the market will likely grow in the coming year as more farmers look to capitalize on the continued surge in land prices. The economist doesn't expect that bump in land inventory on the market to chip away at prices, though.
"Even with substantial gains so far this year, many bankers in the Kansas City and Chicago Districts anticipated that farmland values would rise further in the coming months. With farmland values reaching record highs, several survey respondents noted more landowners were putting farms on the market to take advantage of strong demand from farmers and nonfarm investors," Henderson says. "The cost of financing farmland purchases dropped as interest rates on farm real estate loans trended down in all districts."
Finally, look for the trend in sliding operating loans to continue. "Overall demand for farm loans continued to languish in the third quarter," Henderson says. "Several districts noted a decline in operating loan demand as many farmers used income to pre-pay for crop inputs."