St. Louis Fed Quarterly Ag Survey Shows Continued Decline in Midwest, Midsouth Farmland Prices

ST. LOUIS -  Amid excellent crop growing conditions and lower grain prices, farmland values in the Midwest and Midsouth continued to decline during the second quarter of 2014, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis.

The survey for the report was conducted from June 16 through June 30, 2014. The results were based on the responses of 45 agricultural banks located within the boundaries of the Eighth Federal Reserve District. The Eighth District comprises all or parts of the following seven Midwest and Midsouth States: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

Farmland Values Decline

On average, prices for quality farmland, as well as ranch or pastureland, declined throughout the District. Quality farmland prices averaged $5,473 per acre in the second quarter of 2014, down 0.42 percent from an average $5,496 the first quarter of 2014, and down 3.5 percent from this time last year. Quality farmland prices in the Eighth District have fallen 6.7 percent from peak levels reached in the fourth quarter of 2013. Ranch and pastureland prices also declined in the second quarter of 2014, with lenders reporting average prices of $2,313 per acre, down 7.4 percent from $2,499 per acre in the first quarter and down 2.5 percent from this time last year. Ranch and pastureland prices have fallen 7.5 percent from peak values reached in the fourth quarter of 2013.

Lenders reported that they expect prices for quality farmland to continue to decline in the third quarter, relative to the same period last year, but they expect ranch and pastureland prices to rise slightly. Using a diffusion index to measure banker expectations yields an index for quality farmland values in the third quarter of 2014 of 95, while the index value for ranch and pastureland was 114. (With diffusion index methodology based on survey responses, 101-200 indicates overall expectations of higher values, while 0-99 indicates expectations of decreasing values. A value of 100 indicates expectations remain the same.)

Farm Income, Expenditures Fall

Average farm income, farm household spending and capital equipment expenditures also declined during the second quarter of 2014 compared with a year ago. “Slightly more than half of respondents reported that farm income had decreased in the second quarter of 2014 compared with the same period a year earlier. However the current index did surpass bankers' prior expectations reported three months earlier,” according to the report. Looking ahead, "farm income levels in the third quarter are also expected to be lower than a year earlier, as are household and capital equipment expenditures.”

Cash Rents Rise

While quality farmland prices have declined, cash rents have increased to their highest levels since the St. Louis Fed began its Agricultural Finance Monitor survey in the second quarter of 2012. Average cash rents during the second quarter were $191 per acre for quality Eighth District farmland, up 4.9 percent from the first quarter. Lenders indicated they expected cash rents to remain steady in the next quarter. Meanwhile, lenders reported cash rents for ranch or pastureland fell slightly to $59 per acre, down 4.8 percent from $62 per acre during the first quarter. However, proportionately more lenders reported that they expected cash rents will increase for ranch or pastureland next quarter, relative to the same period a year ago.

Lending Conditions

In looking at three key commercial lending indicators for the farm sector in the Eighth District, proportionately more bankers cited weaker agricultural loan demand in the second quarter relative to the same period a year ago, but had slightly higher expectations for strengthened loan demand in the third quarter. In regard to availability of funds to lend, a proportionately larger number of bankers had more loanable funds available in the second quarter than the year before. The third lending indicator, the rate of loan repayment, showed slightly more bankers reporting higher loan repayment rates than a year ago, and they expect a similar increase in the third quarter.

Across the District's farming sector, interest rates rose modestly for all major variable-rate loan categories, while also rising for machinery/intermediate-term fixed-rate loans. Meanwhile, the interest rate on fixed-rate farm real estate loans declined 2 basis points from 5.20 percent to 5.18 percent.