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A Primer on Factors Affecting Farmland Values
Federal Reserve Bank of Chicago
David Oppedahl Business Economist 312-322-6122 [email protected]
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Monthly
Chicago Fed National Activity Index
Three month average
The economy hit bottom in June 2009, with hesitant growth since then
Above Trend Growth
Below Trend
In December 2008, the Federal Open Market Committee lowered its Fed Funds rate target
to a range from 0 to 0.25%
0
2
4
6
8
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
FedTarget FedFunds
Quantitative easing was necessary
0
500
1,000
1,500
2,000
2,500
3,000
Assets of the Federal ReserveBillions of dollars
Term Auction Credit Securities Held Outright
Central Bank Swaps
Maiden Lane II & III
Commercial Paper Facility
2007 2008 2009
Term Asset-Backed SecuritiesLoan Facility
AIG Support
Maiden Lane
2010 2011
Food price increases again rising faster than core inflation (less food and energy)
(Consumer price index, percent change from year ago)
-2
0
2
4
6
8
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
CPI LFE CPI Food
Why is the Chicago Fed interested in Agriculture?
• Important portion of District economy – Wide geographic impact – “Backbone” of economy
• Leading farm states
• Food manufacturing
– Jobs – Income
• Impact on commercial banks
• Response to stakeholders
7th District Agriculture Products (as % of U.S. total, 2010)
0%
10%
20%
30%
40%
50%
Grain Corn Soybeans Hogs Eggs Milk Production Cattle
Why the interest in farmland values?
• Accounts for huge portion of sector asset value
• An indicator of agriculture’s health
• Affects collateral values & portfolio quality
• Impact on lending institutions
• A factor in the 1980’s farm crisis
Participating Banks Banks in 7th District Land Value and Credit Conditions Survey
Annual change in farmland values in Seventh Federal Reserve District
-30
-20
-10
0
10
20
30
1970 1975 1980 1985 1990 1995 2000 2005 2010
Perc
ent
Year over year changes by quarter in farmland values in the Seventh Federal Reserve District
-5
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005 2007 2009 2011
Perc
ent
Index of Seventh District farmland values (1981=100)
0
50
100
150
200
250
300
350
400
1970 1975 1980 1985 1990 1995 2000 2005 2010
Nominal
Inflation Adjusted
Indices of Seventh District farmland values and USDA farm real estate (1981=100, adjusted by PCE)
0
25
50
75
100
125
150
1970 1975 1980 1985 1990 1995 2000 2005 2010
USDA Index
7G Index
Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100)
0
50
100
150
200
1980 1985 1990 1995 2000 2005 2010
Inflation Adjusted
Nominal
Farmland Price to Earnings Ratio for the Seventh District (1981=1)
0.50
1.00
1.50
2.00
1980 1985 1990 1995 2000 2005 2010
7th District Earnings to Price Ratio (left axis, 1981=1) vs. Real Return on 10 Year Treasury Bonds
0.6
0.8
1.0
1.2
1.4
1980 1985 1990 1995 2000 2005 20100
2
4
6
8
E/P Ratio
10 year bond rate
Percent
What factors affect farmland values?
• Expected net returns • Interest rates
• Government programs • Capital investment in structures • Non-farm demand
• Inflation, lending policies, other investments,
speculation, technology, trade, site characteristics, environmental issues
Corn production a bit smaller than last year
7.5
9.5
6.3
10.1
7.4
9.2 9.29.8 9.4
10.0 9.59.0
10.1
11.811.1
10.5
13.012.1
13.112.4 12.4
0
2
4
6
8
10
12
14
1991/92 96/97 01/02 06/07 11/12*
billi
on b
ushe
ls
0
2
4
6
8
1990/91 94/95 98/99 02/03 06/07 10/11
billi
on b
ushe
ls
Livestock Feed
Food, Seed & Industrial
Exports
Growth in industrial demand (especially for ethanol production) surpassed feed demand for corn
Lower corn stocks and higher prices in 2010/11 and beyond
14%
25%
11%
17%
5%
10%
15%
19%18%
19%
16%
11%9%
20%17%
12%13%
14%13%
9%6%
$0
$1
$2
$3
$4
$5
$6
$7
1991/92 96/97 01/02 06/07 11/12*
Pric
e pe
r bus
hel
0%
10%
20%
30%
Stoc
ks/u
se ra
tio
stks/use ratio price
Soybean production expected to be down...
2.02.2
1.9
2.52.2
2.42.7 2.7 2.6 2.8
2.92.8
2.5
3.1 3.1 3.2
2.73.0
3.4 3.33.1
0
1
2
3
4
1991/92 96/97 01/02 06/07 11/12*
bil
lio
n b
ush
els
Crushings are stalling while soybean exports have climbed in the last decade
0.0
0.5
1.0
1.5
2.0
1990/91 94/95 98/99 02/03 06/07 10/11
billi
on b
ushe
ls
Crush
Exports
Prices moving higher as soybean constraints ease
14%13%
11%
14%
8%
5%
8%
13%
11%
9%
7%6%
4%
9%
16%
19%
7%
5% 4%
7%
9%
$0
$2
$4
$6
$8
$10
$12
$14
1991/92 96/97 01/02 06/07 11/12*
Pric
e pe
r bus
hel
0%
5%
10%
15%
20%
Stoc
ks/u
se ra
tio
stks/use ratio price
Real Crop Prices
($/bushel, adjusted by CPI-U for January 2008)
05
10152025
3035
1976 1981 1986 1991 1996 2001 2006 2011Corn Soybeans
7th District Crop Yield Indexes (1964=100)
100
150
200
250
1964 1970 1976 1982 1988 1994 2000 2006
Corn
Soybeans
U.S. agricultural output, inputs, and total factor productivity (TFP)
(1948=100)
50
100
150
200
250
300
1948 1956 1964 1972 1980 1988 1996 2004
Inputs
Output TFP
Housing market tanked and bounced along bottom
Housing starts (thousands of units, 3-month moving average, SAAR)
0.5
1.0
1.5
2.0
2.5
1999 '01 '03 '05 '07 '09 '114
5
6
7
8
9
1999 '01 '03 '05 '07 '09 '11
Home mortgage rate (percent, effective rate for all loans closed)
Building Permits for Single-family Houses in Chicago Collar Counties
(not seasonally adjusted)
0500
10001500200025003000
1991 1994 1997 2000 2003 2006 2009 2012Inner Outer
Financial indicators for the farm sector
• Net farm income • Farm program spending • Farm balance sheet • Interest rates are still relatively low • Credit conditions improved in recent years
– Fewer loan renewals and extensions – Less than 2% of agricultural loans with
“major” or “severe” repayment problems
Real net farm income boosted by direct government payments to farmers, but the regional impact varies
0
20
40
60
80
100
1980 1985 1990 1995 2000 2005 2010
billi
on 2
005$
gov't payments
2012*
*forecast
Real growth in farm sector assets and equity until the recession, as debt remained more level
0
500
1000
1500
2000
2500
1980 1985 1990 1995 2000 2005 2010
billi
on 2
005$
Debt
Equity
Assets
Farm financial ratios improved following the ‘80s crisis
8
12
16
20
24
1970 1975 1980 1985 1990 1995 2000 2005 2010
perc
ent
Debt/asset ratio
*forecast
2012*
Interest rates charged on new farm loans in the Seventh Federal Reserve District
0
5
10
15
20
1980 1985 1990 1995 2000 2005 2010
perc
ent Farm operating
Farm real estate
Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate)
40
60
80
100
120
140
1980 1985 1990 1995 2000 2005 2010
Index of funds availability for the Seventh Federal Reserve District
708090
100110120130140150160
1990 1995 2000 2005 2010
Index of agricultural loan repayment rates for the Seventh Federal Reserve District
20
40
60
80
100
120
140
160
1980 1985 1990 1995 2000 2005 2010
Global Trade in Action
9.1% of U.S. Exports in 2009 were Food and Agricultural Products
Value of agricultural exports surging again
0
20
40
60
80
100
120
140
FY1970 1975 1980 1985 1990 1995 2000 2005 2010
billi
on $
Exports
Imports
Surplus
(*projected)
2012*
The dollar’s exchange value peaked in 2002, before falling below earlier range
(Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100}
80
90
100
110
120
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Supporting factors for farmland values?
1. Higher expected stream of farm income 2. Productivity and yield trends 3. Mix of investors has broadened (more diversifiers; fewer recreational buyers) 4. Off-farm income growth is uncertain 5. Government payments are lower, but strong
support for crop insurance persists 6. Low interest rates for agriculture 7. Limited availability of farmland 8. Opportunism
Where do farmland values go next?
• Supply of farmland (limited)
• Demand for farmland (strong)
• Farmland values increasing rapidly
• Uncertain future, but it’s not the 1980’s
• Fundamentals favor further increases in farmland values, although not as rapidly
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