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.
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.
Farm Income, Debt Repayment and Farm Capital Spending (Tenth Federal Reserve District) Diffusion Index 2 2 18 16 Farm Income Loan Repayment Rate Farm Capital Spending 18 16 14 14 12 12 1 1 8 8 6 6 4 4 2 2 23 25 27 29 211 Source: Federal Reserve Bank of Kansas City
U.S. Tractor and Combine Sales Thousand units per month 12 12 1 1 8 8 6 6 Rural manufacturing employment Up 3.8% in 211 Up 14% since 29 4 2 4 Wheel Drive Tractor Sales Combine Sales 2 22 24 26 28 21 Source: Association of Equipment Manufacturers 4 2
Farm Operating Loan Demand and Funds Availability Tenth Federal Reserve District Diffusion Index 14 Farm Operating Loan Demand 13 Funds Availability 12 11 1 14 13 12 11 1 9 8 Is this a signal for future loan demand? 22 23 24 25 26 27 28 29 21 211 9 8 Source: Federal Reserve Bank of Kansas City
Real Estate Farm Loans Non-Real Estate Farm Loans Percent Percent 12 12 12 11 1 Large Ag Banks Small and Mid-Size Ag Banks 11 1 11 1 Large Ag Banks Small and Mid-size Ag Banks 9 9 9 8 8 8 7 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 2 22 24 26 28 21 2 22 24 26 28 21 Source: Agricultural Finance Databook Average Effective Interest Rates on Agricultural Loans 12 11 1 9 8 7 6 5 4 3 2
Real Estate Farm Loans Percent of ag loans 16 1 Largest Lenders 14 All Other Lenders 12 Delinquency Rates on Agricultural Loans 16 14 12 Non-Real Estate Farm Loans Percent of ag loans 16 1 Largest Lenders 14 All Other Lenders 12 16 14 12 1 1 1 1 8 8 8 8 6 6 6 6 4 4 4 4 2 2 2 2 1987 1993 1999 25 211 1987 1993 1999 25 211 Source: Federal Reserve Board of Governors
Is there a farmland bubble?
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
Tenth District Farmland Value Gains Percent change from the previous year * 35 3 25 2 15 1 5-5 Irrigated Cropland Ranchland Nonirrigated Cropland -1 2 21 22 23 24 25 26 27 28 29 21 211 *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 35 3 25 2 15 1 5-5 -1
Ratio 35 3 25 2 15 1 5 Farmland Values to Rent Ratio Iowa Farmland Indiana Farmland East NE Irrigated Cropland 35 3 25 2 15 1 5 1975 198 1985 199 1995 2 25 21 Calculations based on Iowa State University,University of Nebraska, and Purdue University data
The Foundation of Farmland Boom/Bust Cycles
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 6 5 4 3 2 1 188 19 192 193 194 195 1959 1969 1978 1987 1997 27 4 3 2 1
195 191 1915 192 1925 193 1935 194 1945 195 1955 196 1965 197 1975 198 1985 199 1995 2 25 21 215 22 Billion dollars (25 constant dollars) 18 16 Agricultural Exports (Left Scale) 14 Prices Received by Farmers (Right Scale) 12 1 8 6 4 2 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) 18 16 14 12 1 8 6 4 2 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.
191 1915 192 1925 193 1935 194 1945 195 1955 196 1965 197 1975 198 1985 199 1995 2 25 21 Percent 2. 15. 1. 5.. -5. -1. -15. Real Yield on 1-year Treasury Security 2 15 1 5-5 -1-15 Calculations based on U.S. Department of Treasury data deflated with consumer price index from the Federal Reserve Bank of Minneapolis.
191 1915 192 1925 193 1935 194 1945 195 1955 196 1965 197 1975 198 1985 199 1995 2 25 21 Billion dollars (25 constant dollars) 4 Farm Non-real-estate Debt 35 Farm Real Estate Debt 3 25 2 15 1 5 U.S. Farm Debt 4 35 3 25 2 15 1 5 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.
Farm Real Estate Debt Percent change from previous year 6 5 21 4.7 3.8 4 211 3 2.4 2. 2 1.6-1 -2-3 -3. -4 USDA Commercial Banks Farm Credit System Source: USDA, Federal Reserve Bank of Kansas City, Federal Farm Credit Banks Funding Corporation
1 9 8 7 6 5 4 3 2 1 Financing Farmland Purchases in the Tenth District Percent of total financing Source: Federal Reserve Bank of Kansas City 19.8 21.2 Cash Down Payment 29.1 31.6 Pledged Existing Equity New Debt Financed 51.1 47.2 211 First Quarter 211 Third Quarter
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.
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
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?
To Receive an Invitation to the Federal Reserve Bank of Kansas City s 212 Agricultural Symposium July 16-17, 212 Please email AgSymposium@kc.frb.org