Farmland Values Hold Steady, But Credit Conditions are Deteriorating

After two years of steep increases, it appears that farmland values are either flattening out or starting to drop, according to the Federal Reserve Bank of Kansas City.

For example, Nebraska farmland values fell in the third quarter compared to a the third quarter of 2008 by about 5%.  The regional change was slightly lower at about a 2% negative change compared to last year.

In the third quarter, more District bankers reported weaker farm incomes primarily due to sagging protein demand and a summer decline in prices.  With shrinking margins, livestock producers have been cutting supplies by culling herds and consolidating feedlots.  In response to a special survey, bankers estimated that livestock returns would be about 10% lower than a year ago.

With lower incomes, farm credit conditions deteriorated in the third quarter.  More bankers reported lower loan repayment rates and a rise in loan renewals and extensions.  They expect this trend to continue to at least the end of the year.  However, bankers also indicated rising farm loan demand and they have plenty of money to lend to creditworthy borrowers.

Since farmland valuations spiked in the third quarter of 2008, year-over-year comparisons will show flat increases or moderate decreases.  This trend most likely will continue as long as farm income is lower than the previous year.

In the third quarter, the farm index fell to below 50, which is the lowest since 2003.  Closely tracking this index was the capital spending index, which also reached a survey low.  As you can see from the chart, these indexes peaked out in late 2007 early 2008 at levels which are about three times higher than the current levels.

 These trends need to be watched and make sure you have a good relationship with your banker and it may make sense to have at least another bank in waiting.