Chicago Fed: Land value increases stall

Editor's note: The following was written by David Oppedahl, policy analyst, and Elizabeth Kepner, senior research analyst, for the Federal Reserve Bank of Chicago November 2024 AgLetter.

With no change in the third quarter of 2024 from a year ago, agricultural land values for the Seventh Federal Reserve District stalled after 18 quarters of year-over-year increases.

Moreover, values for "good" farmland in the district overall were 2% lower in the third quarter of 2024 than in the second quarter, according to the respondents from 119 banks who completed the Oct. 1 survey.

The district's agricultural credit conditions weakened on balance in the third quarter of 2024 relative to a year earlier, although average interest rates on agricultural loans decreased from the second quarter of this year.

Repayment rates for non-real-estate farm loans compared with the same quarter of the previous year were down once more. In addition, renewals and extensions of such loans were above the level of a year ago.

In the third quarter of this year, demand for non-real-estate farm loans was up relative to a year ago for the fourth consecutive quarter, while the availability of funds for lending by agricultural banks was down relative to a year ago for the sixth consecutive quarter.

Farmland values

This was the first period without a year-over-year increase in district farmland values since the fourth quarter of 2019.

Wisconsin had another year-over-year gain in farmland values (but only 4%). Illinois, Indiana and Iowa had year-over-year decreases in farmland values.

According to an Indiana respondent, "Inventory of farmland for sale in the area is still low."

After being adjusted for inflation with the Personal Consumption Expenditures Price Index, district farmland values were down 2% in the third quarter of 2024 relative to a year ago.

Record yields, low prices

Although dryness spread across the district for much of the latter half of the growing season, timely rains pushed corn and soybean production to record highs for the five states in the district in 2024, based on USDA data.

The USDA forecasted the five district states' harvests of corn for grain and soybeans in 2024 to increase by 1.6% and 7.2%, respectively, from their 2023 harvests.

With the U.S. corn harvest projected just below 2023's record, the price of corn in September 2024 was 24% lower than a year ago.

With a near-record U.S. harvest of soybeans projected, their price in September 2024 was 23% lower than a year earlier.

In November, the USDA released price forecasts for the 2024-25 crop year of $4.10 per bushel for corn and $10.80 per bushel for soybeans.

When calculated using these price estimates, the projected revenues from the district states' 2024 combined corn and soybean harvests would be 7.7% under 2023's level, which was already 24% lower than 2022's record revenue.

In contrast, the USDA price index for livestock and animal products was 10% higher in September 2024 than a year earlier.

Compared with a year ago, average prices for cattle, eggs and milk in September 2024 were up 1%, 71%, and 22%, respectively. September hog prices were down 2% from a year earlier.

An Iowa banker said, "Low crop prices and prolonged losses in hog enterprises are combining to create an earnings decline for 2024."

Looking forward

Another respondent from Illinois remarked that "lower net farm income and cash flow difficulties will affect land values."

In the third quarter of 2024, 55% of survey respondents considered farmland to be overvalued and 45% of them considered farmland to be appropriately valued (none viewed farmland as undervalued).

A decline was expected for district farmland values in the final quarter of 2024 by 34% of survey respondents (2% expected them to rise and 64% expected them to be stable).

In line with these survey results, softer demand for agricultural land will likely extend into 2025: 45% and 35% of survey respondents expected farmers and non-farm investors, respectively, to have weaker demand to acquire farmland this fall and winter compared with a year earlier.

Net cash earnings (which include government payments) for crop and livestock farmers were expected to be lower during the fall and winter from their levels of a year earlier, according to the responding bankers.

The livestock sector faced dim prospects for income growth, but nothing like the slump facing the crop sector.

Forty-two percent of the responding bankers predicted a lower volume of farm loan repayments over the next three to six months compared with a year earlier, while just 1% predicted a higher volume.

Non-real-estate loan volumes (specifically for operating loans, feeder cattle loans, and loans guaranteed through the USDA's Farm Service Agency) were forecast to be larger in the last three months of 2024 compared with the same three months of 2023.

Though dipping farm interest rates could help some, agricultural credit conditions were expected to keep weakening as farm incomes, for the most part, keep shrinking.