Farmland values are falling for the fifth straight year in the Midwest. Muted expectations for farm income in 2019 continue to be a factor in declining land values, says the Chicago Federal Reserve Bank’s latest quarterly report.

“The profitability of many corn and soybean farms will almost surely fall from their 2018 levels — possibly by a lot for some,” says David Oppedahl, senior economist for the Chicago Fed. “That’s because market prices are unlikely to rise enough to offset the expected lower yields from the late-planted crops.”

Farmland values for the Seventh Federal Reserve district, which includes Iowa and parts of Illinois, Indiana, Wisconsin and Michigan, declined 1% from July 2018 to July 2019. However, values for “good” agricultural land in the district were unchanged from first quarter to second quarter of 2019.

The survey of 157 ag bankers in the district indicates that 69% of their borrowers were at least modestly affected by extreme weather in the first half of 2019. Despite concerns about the effects on farming from adverse weather and trade disruptions, 83% of the survey respondents expect ag land values in the district to be unchanged during third-quarter 2019 (only 2% expect them to increase, while 15% expect them to decrease).

Ag credit conditions for the district are weaker compared to a year ago. Repayment rates for non-real estate farm loans were lower in second-quarter 2019 than a year earlier. The portion of the district’s ag loan portfolio having “major” or “severe” repayment problems (6.2%) hasn’t been higher in the second quarter of any year since 1999. In addition, renewals and extensions of non-real-estate farm loans are up from a year ago.

Credit availability tightening

From April through June, demand for non-real estate farm loans was higher than a year earlier, but availability of funds for lending by ag banks was lower. For second-quarter 2019, the district’s average loan-to-deposit ratio was 80.2%. Average nominal interest rates for ag real estate and operating loans moved down during the second quarter, while the average rate for feeder cattle loans edged up.

An Iowa banker said, “Farmers are more optimistic with the recent slight increase in crop prices and the government issuing MFP payments,” a reference to the billions of dollars in “trade aid” payments to farmers by the Trump administration. Crop conditions in Iowa are better than in Illinois, Indiana and Michigan. In Illinois, a banker said uncertainty about a smaller harvest “has everyone in a wait-and-see mode.”

Oppedahl says there is widespread expectation among ag bankers that “some of these ag markets will likely not come back the way they were before the trade war. China will never probably want to buy as high a percentage of their soybeans from the U.S. as they did before the trade dispute.”

For more information and to view the survey results, visit chicagofed.org.