St. Louis Fed Ag Survey Shows Farmland Values Down, Incomes Up For Third Quarter 2013

ST. LOUIS – Farmland values and cash rents were down in the third quarter of 2013 (relative to the previous quarter), according to the latest Agricultural Finance Monitor, published by the Federal Reserve Bank of St. Louis. Despite these declines, farm income rose modestly across the District served by the Bank.

The survey for the report was conducted Sept. 11 through Sept. 30, 2013. The results are based on the responses from 47 agricultural banks within the boundaries of the Eighth Federal Reserve District. The District comprises all or parts of the following seven Midwestern and MidSouth states: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. 

Because these initial data are not adjusted for any seasonal irregularities (should they exist), users are cautioned to interpret the results carefully. In particular, users are cautioned against drawing firm conclusions about longer-run trends in farmland values and agricultural lending conditions.  Likewise, because the number of responses from each of the four zones in the District has been relatively small, entailing a higher-than-normal margin of error, we have decided to discontinue publishing zone-by-zone results. The results now refer to the entire Eighth District.

Farmland Values

Values for quality farmland across the District saw a decrease of 6 percent from the second-quarter average. Values averaged $5,332 per acre in the third quarter of 2013, down from $5,672 per acre in the previous quarter.  Despite this decline, quality-farmland values remain 9.1 percent higher than at the same point last year.

Looking forward, “Bankers expect further erosion in District quality-farmland values over the next three months with an index value of 88,” stated the report.  The report uses variables based on diffusion index methodology, where index values of 101-200 indicate higher-realized (or expected) income—based on survey responses—than a year ago, while index values of 0-99 indicate lower-realized (or expected) income than a year ago. A value of 100 indicates the same as a year ago.

According to the survey, the value of pastureland averaged $2,377 per acre in the third quarter, a gain of 1.4 percent over the past four quarters.

Farm Income

Farm income across the District increased modestly from the same quarter one year ago. This increase is in line with previous reports, which have generally indicated healthy farm economic and financial conditions in the District. “Going forward, survey respondents expect farm income levels in the fourth quarter of 2013 to remain modestly above their levels from a year earlier,” said the report.

In addition, the survey indicated that capital and household spending increased modestly in the third quarter relative to the same period one year ago. “For the fourth quarter of 2013, bankers expect that household-spending levels will remain above their year-earlier levels [index value of 105]. By contrast, bankers expect that capital expenditures by farmers will fall modestly short of levels seen in the fourth quarter of 2012 [index value of 95],” stated the report.

Cash Rents

Cash rents for quality farmland across the District averaged $181 per acre in the third quarter, which was down slightly from the second quarter ($183 per acre). However, cash rents for ranchland or pastureland rose modestly in the third quarter ($62 per acre) compared with their second-quarter average ($57 per acre). According to the survey, “Average cash rents have moved steadily upward since the second quarter of 2012—though at an uneven pace. Bankers expect that cash rents for both quality farmland and ranch- or pastureland are expected to increase modestly over the next three months.”

Future Expectations

Expectations for farm income, expenditures and several other key variables in the third quarter were exceeded, relative to expectations from three months earlier. “In particular, expectations were exceeded for farm income, capital spending, availability of funds to extend loans and the rate of loan repayment,” stated the report.

In contrast, the demand for farm loans and household spending was a bit less than expected in the third quarter—though still modestly above year-earlier levels (index values of 105 and 116, respectively). Expectations of loan-repayment rates in the third quarter of 2013 exceeded banker expectations from three months earlier (index value of 105).

Special Questions

As reported in the previous survey (2013:Q2), there was some anecdotal evidence that the method of determining cash rents may be changing. “In particular, there were reports that rents have become more variable over time, in part because of profit-sharing arrangements,” stated the report.

In an attempt to gauge the validity of this hypothesis, bankers were asked to assess the percentage of cash-rental agreements that were written as flexible or variable rental arrangements. Respondents indicated that most rental arrangements in their respective areas did not have these flexible or variable features. For example, 75 percent of the respondents estimated that a third (30 percent) or less of the rental arrangements involved these special features. 

The second question asked respondents to assess the main pricing features of flexible or variable cash-rental arrangements in their area. A little less than half (43 percent) indicated that rents were based on crop yield. Roughly one-quarter (27 percent) were based on a base rent plus a bonus, with roughly one-fifth (22 percent) tied to a variable-rent arrangement based on gross revenue generated by the crop. Very few cash-rental agreements were tied to a commodity-pricing scheme.