A Primer on Factors Affecting Farmland Values Federal Reserve Bank of Chicago David Oppedahl Business Economist 312-322-6122 david.oppedahl@chi.frb.org
The economy hit bottom in June 2009, with hesitant growth since then Chicago Fed National Activity Index 2.0 1.0 0.0-1.0-2.0-3.0 Three month average Above Trend Growth Below Trend -4.0-5.0 Monthly 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
In December 2008, the Federal Open Market Committee lowered its Fed Funds rate target to a range from 0 to 0.25% 8 6 4 2 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 FedTarget FedFunds
Quantitative easing was necessary Assets of the Federal Reserve Billions of dollars 3,000 2,500 Maiden Lane II & III Term Asset-Backed Securities Loan Facility 2,000 1,500 1,000 500 0 AIG Support Central Bank Swaps Commercial Paper Facility Maiden Lane Term Auction Credit 2007 2008 2009 Securities Held Outright 2010 2011
Food price increases again rising faster than core inflation (less food and energy) 8 6 4 2 0-2 (Consumer price index, percent change from year ago) 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) 50% 40% 30% 20% 10% 0% 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 Percent 10 0-10 -20-30 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year over year changes by quarter in farmland values in the Seventh Federal Reserve District 30 25 20 Percent 15 10 5 0-5 1995 1997 1999 2001 2003 2005 2007 2009 2011
Index of Seventh District farmland values (1981=100) 400 350 300 250 200 150 100 50 0 Nominal Inflation Adjusted 1970 1975 1980 1985 1990 1995 2000 2005 2010
Indices of Seventh District farmland values and USDA farm real estate (1981=100, adjusted by PCE) 150 125 100 75 50 USDA Index 7G Index 25 0 1970 1975 1980 1985 1990 1995 2000 2005 2010
Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100) 200 150 Nominal 100 50 Inflation Adjusted 0 1980 1985 1990 1995 2000 2005 2010
Farmland Price to Earnings Ratio for the Seventh District (1981=1) 2.00 1.50 1.00 0.50 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 1.4 Percent 8 1.2 E/P Ratio 6 1.0 4 0.8 10 year bond rate 2 0.6 1980 1985 1990 1995 2000 2005 2010 0
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 billion bushels 14 12 10 8 6 4 7.5 9.5 6.3 10.1 7.4 9.2 9.2 9.8 9.4 10.0 9.5 9.0 10.1 11.8 11.1 10.5 13.0 13.1 12.1 12.4 12.4 2 0 1991/92 96/97 01/02 06/07 11/12*
Growth in industrial demand (especially for ethanol production) surpassed feed demand for corn 8 Food, Seed & Industrial billion bushels 6 4 2 Livestock Feed Exports 0 1990/91 94/95 98/99 02/03 06/07 10/11
Lower corn stocks and higher prices in 2010/11 and beyond $7 30% $6 25% Price per bushel $5 $4 $3 $2 $1 14% 11% 17% 5% 10% 15% 19% 18% 19% 16% 11% 9% 20% 17% 12% 13%14% 13% 9% 6% 20% 10% Stocks/use ratio $0 1991/92 96/97 01/02 06/07 11/12* 0% stks/use ratio price
Soybean production expected to be down... 4 billion bushels 3 2 1 2.0 2.2 1.9 2.5 2.2 2.4 2.7 2.7 2.6 2.8 2.9 2.8 2.5 3.1 3.1 3.2 2.7 3.0 3.4 3.3 3.1 0 1991/92 96/97 01/02 06/07 11/12*
Crushings are stalling while soybean exports have climbed in the last decade 2.0 Crush billion bushels 1.5 1.0 0.5 Exports 0.0 1990/91 94/95 98/99 02/03 06/07 10/11
Prices moving higher as soybean constraints ease $14 19% 20% Price per bushel $12 $10 $8 $6 $4 $2 16% 14% 14%13% 13% 11% 11% 9% 9% 8% 8% 7% 6% 5% 4% 9% 7% 7% 5% 4% 15% 10% 5% Stocks/use ratio $0 1991/92 96/97 01/02 06/07 11/12* 0% stks/use ratio price
Real Crop Prices 35 30 25 20 15 10 5 0 ($/bushel, adjusted by CPI-U for January 2008) 1976 1981 1986 1991 1996 2001 2006 2011 Corn Soybeans
7th District Crop Yield Indexes (1964=100) 250 200 Corn 150 100 Soybeans 1964 1970 1976 1982 1988 1994 2000 2006
U.S. agricultural output, inputs, and total factor productivity (TFP) (1948=100) 300 250 200 Output TFP 150 100 Inputs 50 1948 1956 1964 1972 1980 1988 1996 2004
Housing market tanked and bounced along bottom Housing starts (thousands of units, 3-month moving average, SAAR) 2.5 Home mortgage rate (percent, effective rate for all loans closed) 9 2.0 8 7 1.5 6 1.0 5 0.5 1999 '01 '03 '05 '07 '09 '11 4 1999 '01 '03 '05 '07 '09 '11
Building Permits for Single-family Houses in Chicago Collar Counties (not seasonally adjusted) 3000 2500 2000 1500 1000 500 0 1991 1994 1997 2000 2003 2006 2009 2012 Inner 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 100 billion 2005$ 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2012* gov't payments *forecast
Real growth in farm sector assets and equity until the recession, as debt remained more level 2500 billion 2005$ 2000 1500 1000 Assets Equity 500 Debt 0 1980 1985 1990 1995 2000 2005 2010
Farm financial ratios improved following the 80s crisis 24 20 percent 16 Debt/asset ratio 12 2012* 8 1970 1975 1980 1985 1990 1995 2000 2005 2010 *forecast
Interest rates charged on new farm loans in the Seventh Federal Reserve District 20 15 percent 10 5 Farm real estate Farm operating 0 1980 1985 1990 1995 2000 2005 2010
Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate) 140 120 100 80 60 40 1980 1985 1990 1995 2000 2005 2010
Index of funds availability for the Seventh Federal Reserve District 160 150 140 130 120 110 100 90 80 70 1990 1995 2000 2005 2010
Index of agricultural loan repayment rates for the Seventh Federal Reserve District 160 140 120 100 80 60 40 20 1980 1985 1990 1995 2000 2005 2010
9.1% of U.S. Exports in 2009 were Food and Agricultural Products Global Trade in Action
Value of agricultural exports surging again 140 120 100 Exports billion $ 80 60 40 20 0 Surplus FY1970 1975 1980 1985 1990 1995 2000 2005 2010 Imports 2012* (*projected)
120 110 100 The dollar s exchange value peaked in 2002, before falling below earlier range 90 80 (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100} 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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