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Is a Land Correction Coming?

TAGS: USDA
Is a Land Correction Coming?
Values may have hit a plateau but livestock sector is underlying strength.

With grain prices at three year lows, everyone expects some kind of land correction. The problem is, those expectations haven't really played out. Not yet, anyway.

According to the latest data from the Federal Reserve Bank of Chicago, Midwest agricultural land values have stayed higher than levels of a year ago—a pattern prevailing since late 2009.

The 3% year-over-year increase in farmland values for the second quarter of 2014 was slightly larger than that for the previous quarter (1 percent).

Sure, those aren't the gaudy jumps in values we saw a few years ago. It may be a sign land values are reaching a plateau.

With grain prices at three year lows, everyone expects some kind of land correction. The problem is, those expectations haven't really played out. Not yet, anyway.

After experiencing a quarterly decline in the previous quarter, “good” farmland values for the Fed's Seventh District (Illinois, Iowa, Michigan, Indiana and Wisconsin) rose 2% in the second quarter of 2014 relative to the first quarter, suggesting persistent strength in farmland markets. Only Iowa exhibited a year-over-year decline in agricultural land values, and only Indiana had a quarterly decrease.

Since land values correlate to farm income, a question to consider is this: will the strength in livestock counteract some of the weakness in the crop sector?

According to the Chicago Fed's most recent banker survey, the improved bottom line for dairy operations corresponded with a boost in demand for farmland in some areas. For instance, the surge in dairy farming profits was consistent with Wisconsin’s 6% jump in quarterly farmland values.

Prices of $3.55 to $4.25 per bu. for corn and $9.35 to $11.35 per bu. for soybeans will be offset by expected bumper harvests, boosting crop stocks to levels not seen in nearly a decade. Based on midpoints of these price ranges, the projected values of the U.S. corn and soybean harvests in 2014 are 12% and 7.6% lower than the 2013 harvests.

David Lynn, senior vice president for financial services at Farm Credit Mid-America believes the next few years may bring a correction to land values, one that could have a negative impact on asset values. But Lynn does not believe a correction will be similar to the depression in the farm economy of the 1980s.

"Today's producer balance sheets are much stronger and they aren't nearly as leveraged," he says.

Is a Land Correction Coming?

What can stop this train? Lower net farm income, high interest rates, highly leveraged farm operations, or any combination of the above.

And lenders are smarter, too. Farm Credit's standard practice is to lend 65% loan to value. "So when we saw many land values hit $10,000 to $12,000 per acre we had lending caps established, based on what we estimate is the repayment ability of those producers," Lynn says. "We'll loan money for those purchases but the producer will have to come in with cash or collateral to support the difference. We're not going to go to 85% on $14,000 land if our land cap is not there, so we've built in a safety net for any decline."

What's the future? Lynn says investment dollars will follow the general economy.

"As we see a recovering economy and land prices possibly decline, we think dollars may move out of farm real estate into other areas of the economy," he says.

Bankers in general believe land values have hit a plateau. According to the Fed's latest survey, only 2% of responding bankers expected farmland values to increase in the third quarter of 2014, while 30% anticipate a decrease and 68% forecast no change.

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