Cash Rents are Chasing Land Values are Chasing Commodity Prices Higher
Tuesday, May 24th, 2011
Rising land values and rising cash rents may have solved the perplexing challenge to create a perpetual motion machine. Land values and cash rents both chased each other higher in the first quarter of 2011 within the Chicago Federal Reserve District of all or most of Illinois, Iowa, Indiana, Wisconsin and Michigan.
Within the Seventh Federal Reserve District agricultural bankers have reported that year over year land values in the January to April quarter rose 16%, the largest increase since 2007 and those were at levels not seen since 1979. Fed economist David Oppedahl writes in his quarterly agricultural letter that cash rents paid by farmers to begin the 2011 cropping season were also 16% higher than 2010. The 220 bankers he surveyed reported, “There was more demand to purchase farmland in the six months ending with March 2011 relative to that of the six months ending with March 2010. Farmers (rather than investors) purchased a higher proportion of the acres sold as well. Moreover, the number of farms sold, the acreage sold, and the amount of farmland for sale grew. Over half the reporting bankers expected farmland values to continue rising during the second quarter of 2011.” The explosive growth in the demand to own or rent farmland came in the wake of a weaker demand for real estate that was not agriculturally related.
State by state, and comparing the first quarter of 2011 with the first quarter of 2010, the value of good farmland rose 17% in IL, 19% in IN, 20% in IA, 11% in MI, and 9% in WI. From the first of January to the first of April, the value of good farmland rose 8% in IL and IN, 4% in IA and WI, and 3% in MI.
Cash rents for farmland also rose sharply compared to last year at a healthy clip. State by state, they rose 16% in IL and IA, 15% in IN, 18% in MI, and 20% in WI. Oppedahl adjusted that for inflation and reported the overall cash rent in the district increased 14% from last year.
Oppedahl said the reason for the demand for land was simple, “Prices for these (commodity) products are forecasted by the USDA to remain above the levels of the first quarter of 2011 throughout the rest of this year (partly supported by strong global demand). Based on the USDA index of prices paid by farmers, the increase in input costs for agriculture was 9.4 percent in the first quarter of 2011 compared with the first quarter of 2010. So, agriculture overall saw higher profit levels in the past year—a trend that will likely continue in upcoming quarters.” And Oppedahl said that was attractive to land owners who are demanding higher cash rents, “With 16 percent of farmland on crop shares, 1 percent on a bushel basis, and 3 percent on other arrangements, there appeared to be an inclination by owners to get more involved in farm operations and garner higher returns in 2011.”
With higher prices being paid for farmland and higher cash rents being paid out, is that stressing farmers’ credit? Oppedahl says no, because “stronger income helped stabilize balance sheets.” He says farmers were repaying their machinery and operating loans at a very high rate according to half of the bankers he surveyed, and one third of the bankers reported fewer loan renewals.
But there were still farmers seeking credit, and Oppedahl said for those farmers collateral requirements were tighter than they were in 2010, and the loans guaranteed by FSA remained above 5% of the farm loans in the Chicago Fed District. Interest rates on loans averaged 6.01% for operating loans and 5.8% for farmland, which were higher than prior quarters.
Oppedahl says the boom is not over, since 56% of the bankers he surveyed expect farmland values to continue to rise and only 2% looked for a decline.
Commodity prices continue to rise and that has spurred a willingness to pay higher prices for farmland and higher cash rents to operate farmland. Within the heart of the Cornbelt, both cash rents and farmland values rose by double digits in the first quarter of 2011 compared to the same period of 2010, and bankers are expecting a continued strong demand for land chasing higher commodity prices.
by Stu Ellis