Midwest farmland values continue to rise in First Quarter

David B. Oppedahl
Federal Reserve Bank of Chicago
A report from the Seventh Federal Reserve District shows that agricultural land values continued to strengthen in the first quarter of 2021, rising 7 percent from a year ago.

A report from the Seventh Federal Reserve District shows that agricultural land values continued to strengthen in the first quarter of 2021, rising 7 percent from a year ago.

Moreover, “good” farmland values moved up 3 percent from the fourth quarter of 2020 to the first quarter of 2021, according to the survey responses of 143 District agricultural bankers.

Annual cash rental rates for District farmland increased 4 percent in 2021, bucking the downward trend of the previous seven years. There was a lower amount of farmland for sale in the three- to six-month period ending with March 2021 than in the same period ending with March 2020.

The number of farms and the amount of acreage sold were also lower during the winter and early spring of 2021 compared with a year earlier, yet there seemed to be surging demand to purchase agricultural land. In line with such demand, 74 percent of the responding bankers forecasted District farmland values to be higher during the second quarter of 2021, and the remainder forecasted agricultural land values to be stable.

In a reversal from the first quarter of 2020, when the pandemic started to have negative impacts, District agricultural credit conditions improved during the first quarter of 2021.

Repayment rates for non-real-estate farm loans were up sharply from a year ago, and renewals and extensions of these loans were down. The availability of funds to lend in the first quarter of 2021 was much higher than a year earlier, whereas demand for non-real-estate loans was lower than a year ago.

At 69.7 percent, the average loan-to-deposit ratio in the first quarter of 2021 was at its lowest level since the first quarter of 2015. On net, the amount of collateral required by banks across the District was little changed from a year ago. In addition, average interest rates on farm loans edged down over the first quarter of 2021 from their already low levels at the end of the fourth quarter of 2020.

Farmland values

District agricultural land values jumped 7 percent in the first quarter of 2021 relative to the first quarter of 2020, topping the year-over-year increase for the fourth quarter of 2020.

Farmland values gained 3 percent in the first quarter of 2021 from the fourth quarter of 2020. Indiana, Iowa, and Wisconsin had steeper year-over-year increases in farmland values than did the District as a whole, but Illinois had a more modest increase.

Reserve Senior Business Economist David B. Oppedahl says a large increase in District farmland values wasn’t surprising given that the survey results showed strong demand for agricultural ground, along with limited availability.

"Survey participants indicated that a larger share of acres was purchased by farmers, implying that the share of acres purchased by investors contracted in the three- to six-month period ending with March 2021 relative to the corresponding period ending with March 2020," he said.

Cash rental rates for District agricultural acres climbed 4 percent from 2020 to 2021. For 2021, average annual cash rents for farmland were up 5 percent in Wisconsin.

This was the first increase after seven straight years of declining cash rents (in both nominal and real terms), which constituted the longest such streak in the history of the survey.

Oppedahl says higher farmland values and cash rents were the result of a dramatic turnaround in agricultural prospects from a year ago—generated in part by higher earnings for farms as key agricultural prices recovered after the initial impacts of the pandemic lessened.

In March 2021, corn and soybean prices were 33 percent and 56 percent higher than a year ago, respectively, according to data from the U.S. Department of Agriculture and hog prices were 38 percent above those in March 2020.

In addition, the USDA’s Coronavirus Food Assistance Program pumped $24.1 billion into the farm economy over the past year, with 23.5 percent ($5.68 billion as of May 2, 2021) coming to the five states of the District. Combined, these factors (along with lower real interest rates) boosted farm incomes, helping drive up both farmland values and cash rents.

Looking forward

With the remarkable change in the District’s agricultural situation from a year ago, 74 percent of survey respondents anticipated farmland values to rise in the second quarter of 2021 and 26 percent anticipated them to be stable.

Oppedahl says survey respondents forecasted that the volume of farm real estate loans would increase in the District during the April through June period of 2021 relative to the same period of 2020, but they forecasted that the overall volume of non-real-estate farm loans would decrease.

Volumes for farm machinery and grain storage construction loans were anticipated to increase, whereas volumes for operating and FSA-guaranteed loans, along with those for dairy and feeder cattle loans, were anticipated to decrease.