Strength in farm real estate markets provided support to the agricultural sector amid ongoing financial challenges, say Federal Reserve Bank of Kansas City Economists Cortney Cowley and Ty Kreitman. According to the bank’s Agricultural Credit Conditions, nonirrigated cropland values and cash rents increased slightly in the fourth quarter. They also note that credit conditions in the district remained weak but deteriorated at the slowest pace in more than four years.
However, despite some signs of stabilization, geographic disparities persisted across the region, they note. Land values were stronger on the eastern side of the district, while farm income and credit conditions were weaker in the west. Bankers commented that trade relief payments provided notable support to farm finances in 2019, but many also indicated that underlying weaknesses in the sector continued to be driven by low agricultural commodity prices.
Farmland values increased slightly in the fourth quarter and cash rents remained stable. Nonirrigated farmland values trended higher at a modest pace in 2019 and increased 4% percent in the fourth quarter. Cash rents have trended lower since 2017 but increased slightly at the end of 2019. In the fourth quarter, cash rents were 2% above year-ago levels.
Demand for farmland remained strong in the fourth quarter, which also could have supported farmland values, they observe. The share of farmland purchased by farmers since 2014 has declined from 81% to 74% but remains elevated by historical standards. In addition to the slow pace of decline, farmers have continued to purchase a majority of farmland sold in the district.
In addition, strong demand and lower interest rates may have contributed to higher expectations for farmland values in 2020. For the first time since 2014, more bankers expected farmland values either to remain steady or increase compared with those that expected farmland values to decline. Although 37% percent of bankers expected farmland values to decline somewhat, half expected no change, and 14% expected farmland values to increase moderately in 2020.
However, some risks remained in the outlook for farmland values, as the volume of farmland sales in the district increased for the first time in several years. The volume of farmland sales increased or remained the same in all states in 2019. Throughout the downturn in the Tenth District farm economy over the past six years, a persistently low volume of land sales has contributed to the stability of farmland values. However, additional increases in sales could put some downward pressure on values moving forward, they say.
Furthermore, although farmland values have been stable for the district overall, regional disparities have persisted. For example, values for nonirrigated cropland and ranchland grew at a faster pace in the east from 2009 to 2014. In the fourth quarter of 2019, values for nonirrigated cropland and ranchland increased in the eastern portion of the district, while values in the west declined slightly. Several factors, including land quality and proximity to urban areas, could contribute to higher farmland values in the eastern portion of the Tenth District. However, relative weakness in farmland values in the west could indicate that these areas are more susceptible to financial stress if the agricultural economy weakens further, they note.