A land price bump?

More signs that the cropland price run has hit its ceiling

We noted in the March edition that land prices had turned from a historic climb to a very slight retreat. That was on anecdotal evidence, including various farmland auctions and unofficial reports of land auctions in the Midwest failing to meet reserve bids. The Kansas City Federal Reserve recently released its agricultural credit conditions report, which includes data for fourth quarter 2013 farmland prices. The report gives statistical evidence to our earlier observation and what you’ve been hearing around the neighborhood—there is a pause in hyper-appreciation in farmland. 

According to the KC Fed, farmers continue to be the primary buyers of agricultural land. Most of them intend to expand their operations. Still, price increases have slowed even though there has been less land for sale compared to the previous year.

According to the credit survey, more bankers expected farmland values to decline in 2014.

As real estate stabilizes, economists look for cropland cash rental rates to settle, as they did in the fourth quarter. 

According to the report, “When farmland values were surging in recent years, landowners often negotiated substantial increases in cash rents around year-end. In the fourth quarter of 2013, though, rental rates on District cropland remained largely unchanged from the previous year.”

Farmland prices have leveled partly due to expectations for the near-term farm economy. Agricultural bankers surveyed for the report said farm profits were down in the fourth quarter (for the third straight quarter). Bankers added that weaker farm income boosted loan renewals, and demand for new operating loans held at a five-year high. This need for capital precedes what some of the bankers expect to be a year of low crop prices and high production costs.

However, even with softer prices and tighter margins, lenders have been active. “Agriculture bankers continued to seek qualified borrowers by offering low interest rates on farm operating and real estate loans. The average fixed interest rate on farm operating loans has held below 6 percent for more than a year and the average fixed interest rate on farm real estate was about 5.4 percent throughout 2013. Despite heated competition for farm loans, agricultural bankers reported little change in collateral requirements,” according to the survey.

Still, perception among capital players across the western Corn Belt is that land may have topped for now and could slide from current record highs. 

The credit survey reported, “At the end of 2012, only 1 percent of survey respondents expected a decline in cropland values compared with 16 percent at the end of 2013. Several contacts cited land quality as a main driver of price appreciation and indicated there was still competition for highly productive farmland but little demand for marginal ground.”

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