CHICAGO — Farmland values jumped 23% in the first quarter of 2022 from a year ago, continuing the recent streak of strong year-over-year gains in the Federal Reserve’s 7th District.
“In addition, the value of ‘good’ farmland in the district increased by 4% between the fourth quarter of 2021 and the first quarter of 2022, according to survey responses from 136 district farm bankers,” said David Oppedahl, Chief Business Officer of the Federal Reserve Bank of Chicago. economist.
From April 1, 2021 to April 1, 2022, the value of “good” farmland in Iowa increased by 28% on average, Indiana by 23%, Illinois by 18% in the district and that of Wisconsin by 13% on average.
The findings come from a survey conducted by the Federal Reserve Bank of Chicago and reported in The AgLetter.
The Chicago District includes the northern two-thirds of Illinois and Indiana, all of Iowa, the southern two-thirds of Wisconsin, and the lower peninsula of Michigan.
Even after adjusting for inflation with the personal consumption expenditure price index, the district’s year-over-year gain in farmland values for the first quarter of 2022 was greater than that of any quarter since the first of 2012.
The gain in the first quarter of 2022 also marked the eighth consecutive quarter of positive changes in real terms.
Continued robust increases in district farmland values partly reflected strong demand for farmland. According to an Illinois banker, there was “a strong demand for quality farmland”.
For the three to six month period ending in March 2022 compared to the same period ending in March 2021, 78% of survey respondents reported higher demand for farmland purchases and only 1% reported weaker demand.
Sustained strong demand for farmland and higher transaction prices seemed to incentivize selling; there was a greater amount of land for sale in the last winter and early spring compared to a year ago – 48% of responding bankers said more farmland was for sale in their areas and 16 % said less.
Similarly, the number of farms and the area sold also increased in winter and early spring compared to the previous year.
“Survey participants suggested that the share of acres purchased by investors increased in the three to six month period ending March 2022 compared to the corresponding period ending March 2021, given that the share of acres purchased by farmers has shrunk. In that vein, an Iowa banker reported “a noticeable increase in investor activity in our region,” Oppedahl said.
Agricultural credit conditions for the district further improved in the first quarter of 2022.
“As of April 1, 2022, the average nominal interest rates on operating loans (4.64%), feeder cattle loans (4.74%) and agricultural real estate loans (4.44% ) were higher than at any time since 2020,” Oppedahl reported.
“Yet, after being adjusted for inflation using the PCEPI, average agricultural interest rates have fallen for the seventh consecutive quarter. In real terms, the average interest rates for agricultural real estate loans and feeder cattle loans fell for the last time at the end of the fourth quarter of 1974; the average real interest rate on farm loans – tracked by the survey since the third quarter of 1975 – was at an all-time low.
The index of repayment rates for non-real estate agricultural loans reached the highest level in its history since 1970; 59% of responding bankers observed higher repayment rates for the first quarter of 2022 compared to the first quarter of 2021, and none observed lower rates.
Additionally, only 3% of survey respondents reported higher levels of loan renewals and extensions in the January-March 2022 period compared to the same period last year, while 32% reported lower levels.
Moreover, bankers reported that only 1%, on average, of their agricultural borrowers had more carryover debt—loans not repaid at the end of the growing season and then carried over to the next one—in 2022 than in 2021.
The share of USDA Farm Service Agency-backed loans in reporting bank portfolios was just over 6% for the entire district, about the same level as in the past two years.
“Survey respondents expected agricultural real estate loan volume to increase in the district from April to June 2022 compared to the same period in 2021, but they expected overall non-real estate agricultural loan volume to decrease” , noted Oppedahl.
Volumes of certain types of non-real estate agricultural loans – farm machinery and grain storage construction loans – are expected to be largely unchanged from a year ago.
But volumes of the others – operating loans, FSA-guaranteed, dairy and feeder cattle – are expected to decline.
About 75% of survey respondents in Illinois, Indiana and Iowa thought farmland was overvalued, but the majority of respondents in Michigan and Wisconsin were not. None of the respondents considered agricultural land to be undervalued.
Looking to the second quarter of 2022, 48% of survey respondents expected farmland values to rise, 51% expected it to be flat, and 1% expected it to decline.
“If commodity prices decline and interest rates continue to rise, a decline in real estate values would be expected,” according to an Illinois banker.