Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City Omaha Branch April 10, 2012

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1 Jason Henderson Vice President and Branch Executive April 1, 212 The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

2 Crop producers use booming incomes to pay off debts and boost capital spending. Big cash flows cut loan demand and spur competition for loans. Farmland values surge as rising incomes are capitalized. Is this a New Golden Era or fool s gold? It depends on leverage.

3 Farm Income, Debt Repayment and Farm Capital Spending (Tenth Federal Reserve District) Diffusion Index Farm Income Loan Repayment Rate Farm Capital Spending Source: Federal Reserve Bank of Kansas City

4 U.S. Tractor and Combine Sales Thousand units per month Rural manufacturing employment Up 3.8% in 211 Up 14% since Wheel Drive Tractor Sales Combine Sales Source: Association of Equipment Manufacturers 4 2

5 Farm Operating Loan Demand and Funds Availability Tenth Federal Reserve District Diffusion Index 14 Farm Operating Loan Demand 13 Funds Availability Is this a signal for future loan demand? Source: Federal Reserve Bank of Kansas City

6 Real Estate Farm Loans Non-Real Estate Farm Loans Percent Percent Large Ag Banks Small and Mid-Size Ag Banks Large Ag Banks Small and Mid-size Ag Banks Source: Agricultural Finance Databook Average Effective Interest Rates on Agricultural Loans

7 Real Estate Farm Loans Percent of ag loans 16 1 Largest Lenders 14 All Other Lenders 12 Delinquency Rates on Agricultural Loans Non-Real Estate Farm Loans Percent of ag loans 16 1 Largest Lenders 14 All Other Lenders Source: Federal Reserve Board of Governors

8 Is there a farmland bubble?

9 Non-irrigated Cropland Values Fourth Quarter 211 Percent change from prior year Montana -17.3% North Dakota 21.2% Minnesota 24.% Northern Wisconsin 8.4% Wyoming Colorado Northern New Mexico 14.2% South Dakota 3.5% Nebraska 37.8% Kansas 24.1% Iowa 28.% Western Missouri 18.5% Southern Wisconsin 18.% Northern Illinois 21.% Northern Indiana 27.% Oklahoma 9.2% Texas 6.% Northern Louisiana 8.4% Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City

10 Tenth District Farmland Value Gains Percent change from the previous year * Irrigated Cropland Ranchland Nonirrigated Cropland *Percent changes are calculated using responses only from those banks reporting in both the past and the current quarter. Source: Federal Reserve Bank of Kansas City

11 Ratio Farmland Values to Rent Ratio Iowa Farmland Indiana Farmland East NE Irrigated Cropland Calculations based on Iowa State University,University of Nebraska, and Purdue University data

12 The Foundation of Farmland Boom/Bust Cycles

13 Iowa Corn Prices and Farm Real Estate Values Dollars per acre (Constant 211 dollars) 6 5 Iowa (Left Scale) Corn Price - 5 year average (Right Scale) Dollars per bushel

14 Billion dollars (25 constant dollars) Agricultural Exports (Left Scale) 14 Prices Received by Farmers (Right Scale) Exports Double During WWI U.S. Agricultural Exports and Farm Prices Exports More than Double During WWII Exports Double In 197s Exports Double Between 26 and 211 Index (25=1) Calculations based on U.S. Census Bureau and U.S. Department of Agriculture data deflated with consumer price index from the Federal Reserve Bank of Minneapolis and USDA inflation expectations.

15 Percent Real Yield on 1-year Treasury Security Calculations based on U.S. Department of Treasury data deflated with consumer price index from the Federal Reserve Bank of Minneapolis.

16 Billion dollars (25 constant dollars) 4 Farm Non-real-estate Debt 35 Farm Real Estate Debt U.S. Farm Debt Calculations based on U.S. Census Bureau and U.S. Department of Agriculture data deflated with consumer price index from the Federal Reserve Bank of Minneapolis.

17 Farm Real Estate Debt Percent change from previous year USDA Commercial Banks Farm Credit System Source: USDA, Federal Reserve Bank of Kansas City, Federal Farm Credit Banks Funding Corporation

18 Financing Farmland Purchases in the Tenth District Percent of total financing Source: Federal Reserve Bank of Kansas City Cash Down Payment Pledged Existing Equity New Debt Financed First Quarter 211 Third Quarter

19 Higher interest rates boost debt service costs, can trigger lower farm incomes if the value of the dollar rises and exports fall, and raise capitalization rates, which lowers farmland values.

20 Capitalization Rate (percent) Net Present Value = 3% of Expected Gross Revenue Expected Capitalization Rate Corn Price (dollars per bushel) $3. $4. $5. $6. $7. $8. 3% 6, 8, 1, 12, 14, 16, 4% 4,5 6, 7,5 9, 1,5 12, 5% 3,6 4,8 6, 7,2 8,4 9,6 6% 3, 4, 5, 6, 7, 8, 7% 2,571 3,429 4,286 5,143 6, 6,857 8% 2,25 3, 3,75 4,5 5,25 6, Assumption corn yields 2 bushels per acre

21 Booming farm incomes allowed farmers to pay off debts and boost capital spending. Competition for loans intensifies amid weak loan demand and liquidity. Surging farm land values raise concerns about interest rate risk. How farmers respond to tighter margins will determine if leverage turns today s New Golden Era into fool s gold?

22 To Receive an Invitation to the Federal Reserve Bank of Kansas City s 212 Agricultural Symposium July 16-17, 212 Please AgSymposium@kc.frb.org