WHY WE AREN T LIKELY TO SEE A REPLAY OF THE 1980s FARM CRISIS

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1 WHY WE AREN T LIKELY TO SEE A REPLAY OF THE 1980s FARM CRISIS Wendong Zhang Assistant Professor, Dept. of Economics Iowa State University

2 Why We Aren t Likely to See A Replay of 1980s Farm Crisis Dr. Wendong Zhang Assistant Professor of Economics wdzhang@iastate.edu Day with the Superintendent, April 12, 2018

3 A Quick Introduction: Dr. Wendong Zhang Grown up in a rural county in NE China Attended college in Shanghai and Hong Kong Ph.D. in Ag Econ in 2015 from Ohio State 2012 summer intern at USDA-ERS on farm economy and farmland values Research and extension interests: ISU Land Value Survey, 2017 Land Ownership Survey agriculture and the environment ISU China Ag center

4 China s Provinces My Hometown

5 Ag Land Use Change: Location Matters! Greenhouse plastic film - Shandong Province

6

7 Why Care About Farmland Market?

8 AVERAGE Iowa Land Values $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- $7,326 As of Nov % all farmland Nominal land values Inflation adjusted land values

9 % Change in Nominal Iowa Farmland Values % 30.0% Annual Percentage Change (%) 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%

10 The temporary break in continued declines results from limited land supply Sale Activity Index = % Reported More Sales - % Reported Less Sales % 30.0% 20.0% % 0.0% -10.0% -20.0% Percent_Change Index

11 Guiding Framework Land Value = localized net income / universal interest rate

12

13 Long-term interest rate expectations What the Fed Reserve thinks the interest rate should be March 2018

14 March 17 Sept 17: +2% Sept 17 March 18: +2.9% +5%

15 USDA NASS June Area Survey June 2016 to June 2017 Ag Real Estate Values: + 2.3%; Cropland Values: No change; Pasture Values: +1.5%

16 Farmland Market is Very Thin! Few Observations Annual Agricultural turnover ratio Blue: <0.5% Red: 1.5-2% Illinois <0-3%>

17 Land Values by District and Quality, Nov 2017 District Average Value % Change High Quality % Change Medium Quality % Change Low Quality % Change Northwest $9, % $10, % $8, % $6, % North Central $7, % $8, % $7, % $5, % Northeast $7, % $9, % $7, % $4, % West Central $7, % $8, % $6, % $4, % Central $8, % $9, % $7, % $4, % East Central $8, % $9, % $7, % $5, % Southwest $6, % $7, % $5, % $3, % South Central $4, % $5, % $4, % $2, % Southeast $6, % $9, % $6, % $3, % Iowa Avg. $7, % $8, % $6, % $4, %

18 Livestock and Crop Inventory by Crop Reporting District Livestock Inventory Acres 2012 Harvested Acres 2017 District Chickens, Layers Hogs Milk Cows Cattle Pasture Timber Corn Soybean Northwest 30% 26% 29% 22% 7% 2% 15% 16% North Central 64% 16% 4% 6% 4% 4% 14% 13% Northeast 1% 12% 51% 16% 11% 23% 12% 8% West Central 0% 13% 1% 13% 10% 7% 15% 16% Central 3% 13% 1% 7% 8% 8% 15% 14% East Central 1% 5% 10% 11% 11% 14% 11% 10% Southwest 0% 2% 0% 9% 12% 5% 8% 10% South Central 0% 2% 1% 9% 25% 19% 4% 6% Southeast 1% 11% 3% 6% 12% 19% 7% 8% Iowa Total 52.2 million 20.4 million 0.17 million 3.8 million 2.5 million 1.2 million 12.9 million 10.0 million USDA NASS, Ag Census

19 Stronger than expected crop yields Corn Yield: November 1, 2017 Bushels per Acre Soybean Yield: November 1, 2017 Bushels per Acre State Average: bu/acre State Average: 56.0 bu/acre USDA NASS QuickStats

20 Iowa Major Soil Association Source: USDA NRCS

21 Percent Changes in Land Values from Nov 2016

22 Iowa Farmland Purchases by Buyer Types Percent Existing Farmers Investors New Farmers Other

23 Iowa Farmland Purchases by Seller Types, 2017 Active Farmers Estate Sales Investors Other Retired Farmers PERCENT Northwest North Central Northeast West Central Central East Central Southwest South Central Southeast STATE

24 Cash Crop Price Predictions for Nov 2017, 2018, 2020 as of May 2017 Soil Management Land Valuation Conference May 16, 2018 Wednesday, Scheman Bldg Cash Corn Prices Cash Soybean Prices Northwest $ 3.34 $ 3.65 $ 3.98 $ 9.25 $ 9.61 $ North Central $ 3.42 $ 3.59 $ 3.93 $ 9.16 $ 9.46 $ Northeast $ 3.41 $ 3.59 $ 3.95 $ 9.19 $ 9.28 $ 9.76 West Central $ 3.34 $ 3.59 $ 4.02 $ 9.12 $ 9.33 $ Central $ 3.36 $ 3.50 $ 3.77 $ 9.17 $ 9.40 $ 9.86 East Central $ 3.42 $ 3.58 $ 3.89 $ 9.26 $ 9.51 $ Southwest $ 3.31 $ 3.56 $ 3.94 $ 9.15 $ 9.42 $ South Central $ 3.36 $ 3.59 $ 3.90 $ 9.51 $ 9.76 $ Southeast $ 3.50 $ 3.83 $ 4.17 $ 9.49 $ 9.59 $ STATE $ 3.38 $ 3.60 $ 3.94 $ 9.24 $ 9.48 $ 10.06

25 Source: Purdue Ag Barometer

26 Inflation-adjusted Iowa Ag Real Estate Values Farm Crises and this downturn Source: USDA-NASS; Ag Census, Iowa Farmland Value Portal

27 Positive 1: Real Income Accumulation Source: Zhang and Tidgren 2017

28 Iowa Landowners tend to hold the farmland; and many don t have debt Years Owned % of Iowa Farmland <10 years 24% Years 21% Years 19% Years 15% > 40 Years 20% Source: Ag DM PM1980, 2012 Iowa Farmland Ownership and Tenure Survey

29 Positive 2: Historically low interest rates Source: 10-year-treasury-rate

30 Positive 3: Prudence in Ag Lenders/Regulators Banking Regulations More stringent, frequent stress-test BASEL III, liquidity requirements for banks (Ron Hansen Iowa Division of Banking Superintendent) walk into this with eyes wide open Cash-Flow Based Loan Practice Before 1987: loan to value ratio is 85% : loan to value ratio is 65% After 2008: use cash-flow method for collateral ($4 corn, $10 bean) and 50% of cash flow value Source: Zhang and Tidgren 2017

31 In particular, the OCC handbook states, with respect to underwriting agricultural loans: There should be a strong emphasis on borrower cash flow and repayment capacity. Ag banks should not place undue reliance on collateral and cyclical factors as part of underwriting decisions. Along these lines, banks should be sensitive to evidence of speculation in Ag land prices or commodities that influence the market. For example, an Ag loan approval should be based on a reasonable expectation that operating cash flow will provide sufficient repayment, not on the Ag land value. (OCC 2014). The FCA Loan Portfolio Management handbook includes a section on Lessons from the Past, warning against over-reliance on inflated expectations for future incomes combined with rapidly increasing values for agricultural assets. (FCA 2017).

32 Lenders more institutionalized & regulated FARMLAND DEBT BY LENDER PRIVATE INVESTORS 75% 31% 5.6% COMMERCIAL BANKS 13% 8.7% 37.6% LIFE INSURANCE 12% 13% 5.9% FARM CREDIT SERVICES 37% 46.2% FSA/FARMER MAC 8.3% 4.7% STORAGE FACILITY LOANS 1.8%

33 BASEL-III: Increased capital requirements All FDIC-insured lending institutions, state and federal, are subject to these regulations. Banks must have a total capital to total risk-weighted assets ratio of at least 8 percent. Of that, the ratio for common equity tier 1 capital to total riskweighted assets ratio must be 4.5 percent and the tier 1 leverage capital ratio must be at least 4 percent. Basel III also instituted a new requirement for a capital conservation buffer, designed to strengthen financial resilience during economic cycles. Beginning in 2016, banks must also have buffer capital of.0625%. This minimum requirement increases until reaching 2.5% in In other words, by 2019, the required equity tier 1 capital to total risk-weighted assets ratio for FDIC institutions will be 7 percent. Source: Zhang and Tidgren 2017

34 Cash Rent or Mortgage Payments ($/acre) Annual Mortgage Payments vs. Cash Rents for Iowa Farmland Loan Cash Rent 20-yr PMT 30-yr PMT 15-yr PMT Source: Zhang and Tidgren 2017

35 Cash Rent Per Acre ($/acre) Left: Cash Rent Per Acre Right: Cap Rate (Rent/Value) vs. CMT 10 Rate Illinois Indiana Iowa US Cap Rate or Interest Rate (%) I-States Avg. Rent/Value ratio US rent/value ratio June CMT10Rate Source: USDA NASS, Federal Reserve

36 Farmland Values vs. Capitalized Land Values Source: Sherrick 2018 Choices

37 Source: Purdue Ag Barometer

38

39

40

41 Thank You! Wendong Zhang Assistant Professor and Extension Economist 478C Heady Hall Iowa State University

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