Along With Strong Crop Season, Farmland Also Sowing Value

|
 |  Includes: DBA, FUD, JJA
by: T. Marc Schober

Farmland values rose 4% YOY, according the Federal Reserve Bank of Chicago’s May AgLetter, due to strong demand from farmers and greater availability of fund for lending. The Seventh Federal Reserve District reported QOQ farmland values increased 2%. However, the amount of farmland for sale, the number of properties sold, and the amount of acreage sold was less than first quarter of 2010.

Over the past 12 months, as the economy has rebounded, lending has become more available, and the outlook improved for agriculture, farmers and investors have started to look to acquire more land. We believe that the amount of land sold in the last quarter was muted due to the late harvest and early planting. The traditional selling season of post and pre harvest was delayed as farmers tried to get their crops out of the ground and put in an early planting for 2010.

Values

In the Seventh District, farmland values rose 4% compared to the first quarter of 2009, with values increasing 4% in Illinois, 7% in Indiana, and 8% in Iowa. Wisconsin farmland values decreased 1%. QOQ values were very strong in the first quarter of 2010 as overall values rose 2%. Farmland values increased 4% in Indiana, 3% in Iowa, 2% in Wisconsin, and 1% in Illinois compared to the last quarter of 2009.

David Oppedahl, an economist at the Federal Reserve Bank of Chicago, said:

Farmers had a good year in 2009 despite some tough conditions.

Rents

Cash rental rates did not increase as aggressively as farmland values, rising just 1% in 2010. Cash rental rates rose 3% in Indiana, 1% in Iowa, 8% in Wisconsin, and were unchanged in Illinois. When adjusting for inflation, cash rental rates actually declined 1% from the first quarter of 2009.

The increase in farmland values relative to cash rental rates has lead to a rise in the price-to-earnings ratio for farmland, although the current price-to-earnings level is considerably below the all-time high in 2005. We feel due to the difficult harvest in 2009 and limited amount of land sales, that farmers had some leverage when negotiating new rental contracts, which could have kept cash rental rates down slightly.

Credit

The Federal Reserve Bank of Chicago reported mixed credit conditions in the first quarter. The loan demand index was at its highest level in the last 12 months as 29% of bankers reported higher demand, while only 20% reported lower demand. 32% of bankers noted that more funds were available for lending compared to last year. Interest rates on agricultural real estate loans declined to their lowest levels in six years, average 6.04%.

Outlook

Bankers expect that farmland values would remain constant in the second quarter of 2010. This is to be expected as a limited amount of farmland changes hands in this time period. The respondents also expect real estate loan volume in the second quarter of 2010 to remain the same.

As we noted earlier about the delayed selling season, we expect the end of 2010 to see a large volume of farmland sales. So far in 2010, farmers have been successful with an early planting season and are in position to have an excellent crop. We also expect to continue to see corn imports from China throughout the year, which could reach 1.5 million tons in 2010.

If farmers can have a relatively good crop, grain prices remain stable, and credit is available, the end of 2010 could see a large jump in the amount of farmland sold and the values.

Disclosure: No positions