The Federal Reserve Bank of Kansas City reports that strong farm income propelled farmland values to record highs and strengthened loan portfolios at agricultural banks at the end of 2011. Jason Henderson, Omaha Fed branch executive, says cropland values across the Corn Belt and northern Plains soared to all-time highs with many states posting annual value gains between 20 and 40%.
In addition, ranchland values rose sharply compared to last year as high feed costs boosted demand for prime pasture ground. Even drought-stricken areas of the southern Plains posted modest farmland value gains.
The Kansas City Bank also reports agricultural bank profits improved as borrowers repaid farm debts. In the third quarter, the return on assets at agricultural banks rose further and remained stronger than their banking peers. The share of delinquent farm real estate loans fell, and delinquent non-real estate loan volumes hit their lowest level since 2009. Bankers reported fewer loan renewals and extensions, so the downward trend in delinquency rates will likely continue.
Rising farm incomes boosted liquidity in the farm sector and slowed non-real estate lending in 2011. Agricultural bankers reported soft operating loan demand throughout the year. Meanwhile, commercial banks struggled to maintain market share. According to call report data, farm real estate loan volume at commercial banks for the third quarter was up just 0.6% compared to last year. In contrast, third quarter financial statements from the Farm Credit System reported 4.4% growth in farm mortgage loan volume year-to-date.
Looking ahead, Henderson says the number of farms on the market will likely grow in the coming year as more farmers look to capitalize on the continued surge in land prices. The economist doesn't expect that bump in land inventory on the market to chip away at prices, though.
"Even with substantial gains so far this year, many bankers in the Kansas City and Chicago Districts anticipated that farmland values would rise further in the coming months. With farmland values reaching record highs, several survey respondents noted more landowners were putting farms on the market to take advantage of strong demand from farmers and nonfarm investors," Henderson says. "The cost of financing farmland purchases dropped as interest rates on farm real estate loans trended down in all districts."