U.S. farmland values fell in tandem with lower farm incomes to end 2016. While that trend was expected to continue through the first quarter of 2017, several factors will determine the land value direction in the year ahead, according to Randy Dickhut, senior vice president of real estate operations for Farmers National Company.
As an agricultural landowner services company, Farmers National provides auction, appraisal, insurance and other management and consultation services for more than 5,000 farms and ranches in 28 states. It has sold more than 3,800 farms during the last five years.
Farmers National data showed nationwide price trends varied by farmland quality. In general, high-quality farmland held value, while medium-quality land trended downward. Low-quality land struggled, and in many cases, it was difficult to sell.
“This winter, questions abound as to the direction of commodity prices, interest rates, inflation, challenges in the world economy, weather and U.S. tax law,” Dickhut said. “Buyers of ag land are asking if it is an opportune time to make a purchase of a farm or ranch, while sellers are asking if the market dynamics are indicating that it is a good time to sell land. Depending on location, quality of land and other factors, our agents report seeing regions and local areas where land prices are stable to somewhat strengthening post 2016 harvest. Then there are other areas where land values have continued to decline.”
A key factor impacting land prices will be interest rates, Dickhut said. Grain and livestock prices affecting farm and ranch income also will influence land values.
“Foreign trade policy and its effect on agriculture will be closely watched over the next few months. Potential changes in tax laws could affect estate taxation and capital gains rules that in turn influence buying and selling decisions,” Dickhut said.
Regional trends
Here’s a look at regional farmland value trends and credit conditions in the fourth quarter of 2016.
Chicago: A slower annual decline
Farmland values in the Federal Reserve Bank of Chicago district suffered a third consecutive annual decrease, yet the 1 percent decline for 2016 was smaller than the 3 percent declines for the previous two years.
David Oppedahl, business economist, summarized land values and credit conditions in the Chicago bank’s latest AgLetter. The district covers all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin.
Since hitting peak values in 2012-13, Iowa, Illinois, Indiana and Michigan farmland values have experienced real declines of 15 percent, 11 percent, 7 percent and 12 percent, respectively. In contrast, Wisconsin agricultural land values have risen 4 percent during the period.
Farm credit conditions deteriorated in the fourth quarter of 2016. Lower repayment rates combined with higher rates of loan renewals and extensions, suggest a worsening credit climate. Additionally, lenders said about 3 percent of farm loan customers would not qualify for operating credit.
A notable development was an upward quarterly shift in ag loan interest rates. As of Jan. 1, 2017, variable rate interest rates for all loan types were at their highest levels since the end of 2013.
Read the full Chicago district report.
Kansas City: land values, cash rents lower
Persistent farm income weakness pressured farmland values and cash rents moderately lower in the fourth quarter of 2016, according to a quarterly survey of ag bankers in the Federal Reserve Bank of Kansas district. The region covers Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.
Among those states, steepest annual declines for nonirrigated farmland were in Kansas and Nebraska. Decreases in ranchland values in Kansas, Nebraska and Missouri were the largest since 2002.
When combined with previous quarters, the full-year 2016 decline was the largest since the Great Recession of 2007-09, but still relatively small compared to declines in the 1980s, according to Cortney Cowley, economist, and Matt Clark, assistant economist.
Amid the slump in farmland values, cash rents also edged down. Cash rents for nonirrigated and irrigated cropland each fell 8 percent, while ranchland cash rents fell 12 percent from a year earlier. The reduction in cash rents could help alleviate some pressure on profit margins, Cowley and Clark said.
Credit conditions also weakened. Loan repayment rates declined, while demand for renewals and extensions increased. Despite those factors, bankers reported no significant increase in nonperforming loans at agricultural banks. Producers appear to be selling commodities only when necessary to make loan payments, but otherwise are storing commodities in the hope of better prices in the future.
Variable and fixed interest rates increased for all types of farm loans, with interest rates for variable-rate operating loans reaching the highest level since the third quarter of 2012. More than 30 percent of bankers reported an increase in collateral requirements.
Read the full Kansas City district report.
St. Louis: A reversal
Following an upward move in land values in the third quarter of 2016, values of all types of land reversed course to end the year, according to Federal Reserve Bank of St. Louis staff economists. The district covers all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. Districtwide pastureland/ranchland average values were down 3.5 percent, with farmland values down 8 percent compared to a year earlier.
Ranchland or pastureland cash rents experienced another large year-over-year decline in the quarter, down 11.6 percent, while the rent decline was a moderate 1.8 percent for quality farmland.
Interest rates on fixed- and variable-rate operating loans increased more than 10 basis points (0.10 percent) from the third to the fourth quarter. However, interest rates on fixed- and variable-rate intermediate and farm real estate loans diverged from the previous quarter.
Across the district, farm income levels fell for a 12th consecutive quarter, and there’s little expectation that will change in early 2017. A majority of bankers reported increased loan demand in the quarter, while loan repayment rates were down.
Read the Agricultural Finance Monitor.
Dallas: Quarterly values lower
Low commodity prices raised concerns for ag producers’ financial positions and profitability, according to a fourth-quarter agricultural bankers survey in the Federal Reserve Bank of Dallas district. The district covers all of Texas and portions of New Mexico and Louisiana.
Real district land values decreased across the district during the quarter, down 4.3 percent for dryland and 5.2 percent for irrigated cropland. However, nominal district land values increased year over year, with dryland up 3.2 percent and irrigated cropland up 2.8 percent. Survey respondents expect farmland values to trend down in the coming months.
Operating loan volume increased year over year, while overall ag loan demand decreased for a fifth consecutive quarter. Loan renewals and extensions continued to increase, albeit at a slower pace. The credit standards index indicated continued tightening of standards.
Read the full Dallas district report.
Minneapolis: Quarterly values lower
Land prices and cash rents continued to retreat from historic highs in the Federal Reserve Bank of Minneapolis district, according to Joe Mahon, regional outreach director. The Ninth Federal Reserve district covers all or portions of Minnesota, Montana, North Dakota, South Dakota and Wisconsin. The district’s report lags similar surveys in other Federal Reserve districts, and is based on ag lender responses from October 2016.
Declining land prices were widespread across the region, with the exception of Montana. Values fell most in North Dakota. The district average value for non-irrigated cropland fell by more than 3 percent from a year earlier. Irrigated land values fell 1 percent, while ranch- and pastureland values fell 5 percent, perhaps reflecting the downturn in livestock prices.
Cash rents also decreased across the region, but fell the most in Wisconsin, where rental rates for non-irrigated land were down 12 percent from a year ago. The district average cash rent for non-irrigated land dropped by more than the decrease in value, down almost 5 percent from a year ago. Rents for irrigated land decreased about 6 percent, while ranchland rents fell by 10 percent.
Read the full Minneapolis Fed ag lender survey summary.
Pacific Northwest: ag land demand strong
The story was somewhat different in the Northwest, where limited land offerings were met with strong demand, helping push agricultural real estate values higher in 2016, according to the latest Northwest Farm Credit Services (FCS) Land Values Market Snapshot. However, lower commodity prices, lower net farm income and rising interest rates are creating a less certain outlook.
Northwest FCS appraisers track market data throughout Idaho, Montana, Oregon and Washington. While values differed by area, most land values were steady to higher in 2016, with good quality cropland increasing the most.
In Idaho, a limited number of properties and fewer higher-quality farms close to major farming areas created competition among established agricultural operators and investors. Environmental regulations and restrictions in California and Washington have prompted dairy operators to look toward Idaho as an alternative location, although anticipated water constraints in parts of southern and western Idaho continue to challenge crop production.
Demand was strong for high-quality crop tracts and pastureland in Montana. Low supplies of high-quality land are limiting sale transactions in Washington. Sale prices for most irrigated land remains strong with good demand from local farmers. Low cattle prices may pressure pasture prices downward. 
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Dave Natzke
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- Progressive Dairyman
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