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Agricultural News

Not to Break Your Heart on Valentine's But Risks to Ag's Economic Outlook Remain, Despite Stability

Thu, 14 Feb 2019 14:30:14 CST

Not to Break Your Heart on Valentine's But Risks to Ag's Economic Outlook Remain, Despite Stability The Federal Reserve Bank of Kansas City reported this week that farmland values in the Federal Reserve’s Tenth District held steady during the fourth quarter of 2018 despite risks to ongoing stability. The report details that while demand for farmland remained relatively strong across the District, weaknesses in the crop sector continued to dampen the overall agricultural economy. During this quarter, slightly higher interest rates and an uptick in the pace of farmland sales in states with higher concentrations of crop production were presented as risks to the economic outlook of this area. In addition, continued deterioration in farm finances and credit conditions put further pressure on values for farm real estate. Looking into 2019, bankers expect farmland values to be slightly weaker than a year ago.

According to the Tenth District Survey of Agricultural Credit Conditions, declines in the value of nonirrigated and irrigated cropland remained modest across the District, and declined only 3 percent from last year. On average, cropland values declined at a slower pace in 2018 than in the previous two years. However, ranchland values increased slightly for the second quarter in a row, the first consecutive increase in farmland values since 2015.

Farmland values were more stable in states more concentrated in livestock and energy production, data shows. Although irrigated cropland values declined at a faster pace in the Mountain States and Oklahoma, nonirrigated cropland was relatively unchanged while ranchland values increased more than 3 percent. Furthermore, most of the strength in ranchland values across the District was driven by developments in the Mountain States and Oklahoma, states with higher concentrations of cattle production. Bankers in these states also commented that farmland values have been supported by an uptick in activity in the energy sector.

The report also shows that demand for real estate remained strong in the farm sector, which could be supporting farmland values. Although the share of farmland purchased by farmers has trended lower since 2014, the decline has remained modest. In 2018, farmers remained the primary buyers of farmland and accounted for more than 75 percent of purchases.

Despite strong demand, a higher volume of sales in parts of the District in the fourth quarter could be a key risk to the outlook for farmland values. During the current downturn in the agricultural economy over the past five years, the persistently low volume of land sales has contributed to the stability of farmland values. However, if the supply of farmland continues to increase in 2019, farmland values could be less stable.

Bankers also indicated they expected farm income to remain weak in the first quarter of 2019. Similar to 2017, nearly 60 percent of respondents reported lower capital spending than a year ago. Although 30 percent of bankers indicated that household spending had decreased from a year ago, the majority continued to report no change.

Alongside lower farm income, demand for farm loans also remained high. Bankers expect high demand for farm loans and tight liquidity will continue.

In conclusion, the report summarizes that the combination of deteriorating farm finances, another year of low farm income, and higher interest rates may have contributed to a slight decline in the share of farmland purchased by farmers. Although farmers remained active in farm real estate markets, lower demand for farmland, combined with a slight uptick in volume of farmland sales in some states could weigh on farmland values moving forward. Even as risks to recent stability in farm real estate markets mounted through the end of 2018, the value of farmland continued to provide ongoing support to the farm sector and remained a key factor to monitor in 2019.

Find the latest Agricultural Credit Survey by clicking here.

Source - Federal Reserve Bank of Kansas City



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