Farmland prices in the U.S. Plains states extended record-setting gains in the fourth quarter of 2011, rising 25 per cent from a year earlier as cash-rich farmers competed for land, the Federal Reserve Bank of Kansas City said Feb. 15.
In a quarterly survey that provides an important gauge of the U.S. agricultural economy, the Fed also said credit conditions improved as farmers paid down debt at the year-end, comments that may help temper concerns of a land-price bubble.
“Strong farm incomes were fuelling the robust farmland value gains,” the Fed said in the survey of 253 bankers in its district.
Non-irrigated cropland values jumped almost nine per cent in the last three months of 2011 and were 25 per cent higher than year-earlier levels, matching the record pace in the third quarter.
“District bankers noted an increasing number of absentee landowners were putting their farms up for sale and attributed much of the auction activity to landowners seeking top-dollar prices. Farmers were the main buyers,” the Fed report said. It said the share of non-farmers who purchased land had diminished over the past six years to about one-quarter of all buyers.
The corn state of Nebraska saw the biggest jump — a 37.8 per cent year-on-year price gain for non-irrigated cropland.
Farmland values are closely monitored by economists at the Federal Reserve and by commercial banks, as a barometer of U.S. banking assets and as a benchmark for agricultural balance sheets. Farmland is basic collateral for farm loans.
Skyrocketing land values have caused worries among bankers about the possibility of a ruinous farmland bubble like the one seen in the 1980s U.S. farm crisis, when overleveraged farmers lost their land as interest rates jumped.
But farmers carry much less debt now, thanks to record farm income. Grain prices and production have also been strong, a rare double for farmers used to seeing prices fall as production rises. Booming farm exports and domestic ethanol have changed that traditional equation, market analysts say.
The Fed’s 10th district stretches across the major wheat, corn and cattle states of Colorado, Kansas, Nebraska and Oklahoma, along with Wyoming and parts of New Mexico and Missouri. The area has seen a jump in corn prices in recent years with the rapid expansion of corn-based ethanol output.
“Strong farm incomes were fuelling the robust farmland value gains. During the fourth quarter, crop prices remained historically high but volatile, while livestock prices were well above year-ago levels,” the report said.
“Half of survey respondents reported higher farm income in the fourth quarter compared to last year, and almost a third expected further income gains in 2012. With bullish farm income prospects, many landowners negotiated steep increases in cash rental rates for farmland,” the bank said.
But farm income varied in the district, with some hurt by flooding and others by drought. The strong grain and livestock prices helped buoy Oklahoma and Kansas ranchers where drought forced them to reduce herd sizes to historical lows.
Farmer demand robust
A third of the district bankers surveyed expected the price and amount of farmland offered for sale to continue to rise in 2012, as well as farm income.
One banker from eastern Nebraska said that “with current price levels, many older landowners are cashing out.”
Such farm sales were met by robust farmer demand, pushing land prices higher. The Fed said farmers bought 73 per cent of the farmland sold in 2011, up from 60 per cent in 2005.
“Land sales have exploded in number and price due to record farm profits. Many farmers have also prepaid for nearly all of next year’s crop inputs,” a banker in northeastern Nebraska told the Fed.
Of non-farmer purchases, more bankers reported farmland being bought for investment purposes such as rental income and earning capital gains. Farmland purchases for recreational use or residential/development projects continued to fall.
“Two reasons given for buying farmland are alternative investments are limited and land will always be there,” one banker in northeastern Colorado told the Fed.
Cash rents for farmland jumped last year, up 18 per cent compared to a six per cent gain in 2010 as “landowners factored in high farm income expectations when renegotiating lease terms,” the Fed said. Ranchland rent values rose but at a slower rate, about 10 per cent, versus a four per cent average annual gain in 2010.
Interest rates averaged 6.3 per cent on farm operating loans in the quarter and for farm real estate loans fell below six per cent for the first time in survey history, dipping to 5.9 per cent, the Kansas City Fed said.