Farmland Values Drop for the Quarter
The Federal Reserve Bank of Chicago reported that for their district (Illinois, Indiana, Iowa, Michigan and Wisconsin) farm land values dropped 6% from the previous quarter (the largest drop for a quarter since 1985). Also, the year-over-year increase in farmland values was up only 2% for the first quarter of 2009. The drop ranged from 3% in Indiana to 7% for Iowa and Wisconsin. Some parts of Iowa were down 12% for the quarter.
Increases in cash rental rates also slowed to an annual increase of 7%. However, with the drop in commodity prices and the continued high input costs, this should continue to squeeze farmer’s margins. State increases for cash rents were 8% for Illinois, 6% for Indiana, 8% for Iowa and 2% for Wisconsin, while Michigan’s cash rental rates declined for the year.
The increase in cash rental rates has outpaced the increase in land values. This results in the price-to-earnings (P/E) ratio for farmland continuing to decrease. This index (with 1981 equaling 1.0) has ranged from a low of about .75 in the mid-80’s to over 1.4 in about 2006. The index currently stands at 1.25 compared to 1981. A good rule of thumb is as this ratio gets too high, then farm land values are probably overstated. As this ratio gets too low, then the opposite it true.
For the District, cash rental arrangements continue to be the large majority of leases. For the quarter, cash rental arrangements were used 80%, crop-share were used 16%. Cash crop rentals ranged from 68% in Illinois to 97% in Wisconsin.
As of April 1, District interest rates had reached an all-time low of 6.20% for new operating loans and 6.14% for farm real estate loans. However, with the recent spike in 10-year Treasury Bond rates, it is my estimate that these rates may be materially higher for the second quarter (it would not surprise me that they are close to 1% higher).
Looking Forward – About 30% of the bankers polled expect farmland values to continue to drop, while the remainder expect the values to remain about the same. This same ratio applied to expectations for new farm loans for real estate.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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