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Corn Belt ag bankers say land values, loan volume tumbling through year's end

In Iowa, Wisconsin, northern Illinois, northern Indiana and part of Michigan (the area comprising the Fed's 7th District), land values overall were 4% lower than they were ago as of the end of October, according to a report from the Federal Reserve Bank of Chicago. Though the value drop wasn't too steep on its own, ag lenders responding to a recent Chicago Fed survey say lower demand will be a key feature of the marketplace in the coming quarter, at least. That goes for farmers and non-farm investors, according to Fed economist David Oppendahl.

"Agricultural credit conditions in the third quarter were weaker than a year ago. Lower demand for non-real estate loans in the third quarter of 2009 contrasted with increased funds availability at District banks," Oppendahl says. "Loan payment rates declined compared with the July through September period of 2008, whereas loan renewals and extensions rose. Farm operating and real estate loan interest rates were a bit lower. The banks' loan-to-deposit ratios averaged 75.3%, the lowest level in over a year."

The biggest message lenders conveyed in the Fed survey is a reversal in opinion from a year ago. Now, the majority of the area's ag lenders see a continued erosion in farm land and corresponding values.

"The demand among farmers to purchase farmland was forecasted to ebb this fall and winter," Oppendahl adds. "More respondents anticipated lower rather than higher interest by farmers in acquiring agricultural land (30% versus 14%). The expectation remained the same for the interest from nonfarm investors to diminish: Just 17% of the responding bankers predicted higher demand for farmland among nonfarm investors over the next three to six months, and 39% anticipated lower demand."

And, there's a direct link between this ebbing demand and expected lower farm incomes for the 7th District, the economist says. Farmers in the region expect lower net cash earnings for both crop and livestock farms through this winter. Last year at this time, income projections were still bullish.

"For crop farms, the combination of lower corn and soybean prices and relatively less relief from high input costs led 85% of responding bankers to predict decreases in net cash farm earnings over the next 3 to 6 months compared with earnings the previous year. Only 4% foresaw increases. Moreover, respondents anticipated even more severe cuts than a year ago in net farm earnings for dairy farmers (1% up versus 83% down) and for cattle and hog farmers (2% up versus 84% down)," Oppendahl says. "Though the drag from feed costs was smaller, the slump in livestock product prices had not recovered enough from the recessionary hit on demand in order to boost livestock returns."

Moving forward through the rest of 2009 and beyond, Oppendahl says lenders responding to the Fed survey showed signs that they don't expect things to change much very soon.

"Responding bankers did not see agricultural credit conditions improving during the fall and winter -- a complete flip from the trend of a year ago. Far more bankers expected the volume of farm loan repayments to decline over the next 3 to 6 months compared with a year ago than rise," he says. "For the October through December period of 2009, 22% of the bankers anticipated higher non-real estate loan volume than in 2008 and 24% anticipated lower volume."

But, there remains one anomaly in the figures for farm borrowing: Grain storage. Says Oppendahl: "Interestingly, in Indiana and Iowa more bankers forecasted increases rather than decreases in grain storage construction loan volume during the fourth quarter of 2009 relative to the same quarter of 2008."

Just days after the 10th District Federal Reserve Bank of Kansas City released numbers showing farmland values in that region had "plateaued" but showed signs of tipping lower again soon another branch of the Fed painted a more bearish picture for the land market in the Corn Belt.

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