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Fed survey confirms farmland plateau

Though the numbers show a year-over-year double-digit gain in farmland values as of October in the bulk of the Corn Belt, that trend effectively ended at the start of the third quarter, adding evidence to growing sentiment about the reality of a leveling off and possible downturn in farmland values in the coming months.

Farmland was worth 14% more this October than it was the same time a year ago, though all but 1% of that gain came in the first three-fourths of the year. The trend definitely leveled off, according to data released by the Federal Reserve Bank of Chicago this week. That's in line with other recent outlooks that paint a less bullish picture of the Midwest farmland market in the months ahead.

"There was a 1% increase in 'good' agricultural land values in the third quarter relative to the second quarter of 2013, according to the 195 agricultural bankers that provided responses for the October 1 survey," according to a report by Fed senior business economist David Oppendahl. "While district farmland values increased on the whole in the third quarter of 2013, this upward trend was not expected to continue: The respondents' expectations leaned toward a decrease in farmland values in the fourth quarter of 2013, as only 4% anticipated an increase and 21% forecasted a decrease (75% foresaw stable farmland values)."

The reversal in land value looks sustainable in the next few months, Fed economists say. That's mostly because of grain prices. This fall's corn and soybean crops, despite abnormally dry conditions during much of the growing season, were larger than most expectations, and that's fueled lower prices. And, with prices already flirting with break-even levels, land prices -- a critical input cost for Corn Belt crops -- will likely continue to trickle lower to keep prices within at least a range of breakeven.

"For the five District states (Iowa, Wisconsin, Illinois, Indiana, and Michigan), soybean production was projected by the USDA to rise 8.5% in 2013 from its 2012 level. Even with the reoccurrence of drought in parts of the District, the third-largest corn harvest, and a soybean harvest just outside the top-10 filled storage bins across the Midwest," Oppendahl says. "Better-than-expected crop yields for the District may have contributed to the momentum of its rising farmland values; however, in areas affected by back-to-back droughts, the loss of revenue from declines in crop prices and yields may have constrained farmland value gains."

And, despite years of bullish sentiment in both the Corn Belt grain and farmland markets, the tide's turning: The Chicago Fed survey results comprise another confirmation that both markets may have plateaued and will spend time now trending lower or marking time at or near current levels.

"Survey respondents predicted some stark differences for the coming months. The respondents' expectations tended to indicate a reversal of fortunes for farmland values; indeed, only 4% of the respondents anticipated higher farmland values in the October-through-December period of 2013, while 21% forecasted lower farmland values," Oppendahl says. "Survey respondents predicted farmers' demand to acquire farmland this fall and winter to be stronger than a year ago, whereas they expected the opposite for nonfarm investors' demand."

Still, there's a silver lining in the Chicago Fed's outlook; if you raise cattle or hogs, you're in luck. Lower grain prices make for a lousy outlook for cash grain farmers, but the opposite is true for hogs and cattle.

"Thirty-seven percent of the respondents expected higher net earnings for cattle and hog operations over the next three to six months relative to a year ago. In October 2013, cattle and hog prices were 0.8% and 11% higher than a year ago, respectively," Oppendahl says.

Looking ahead, watch loan repayment and non-real-estate loan volume for signs that the general downturn in the Midwestern ag sector is reaching fruition. Those two factors -- common ones addressed by the ag lenders whose opinions are sought by the Fed's surveys like the one released this week -- will be the main bellwethers in the next few months.

"Loan repayment was anticipated to worsen, with 17% of the responding bankers predicting the volume of farm loan repayments to rise in the next three to six months relative to a year ago and 26% expecting this volume to fall," Oppendahl says. "There were more survey respondents predicting an increase vs. a decrease in non-real-estate-loan volume for the October-through-December period of 2013 relative to the same period of 2012.

"If these predictions were to come about, the index of non-real-estate-loan demand would hit its highest level since 2007."



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