Farmland Bubble Bursts As Ag Credit Conditions Crumble

Aside from a brief pause during the "great recession" of 2009, Midwest farmland prices have been bubbling up for over a decade with annual price increases of 15%-30% in many years.  Private Equity and low interest rates no doubt played a role in creating the farmland bubble as "excess cash on the sidelines" sought out investments in hard assets (see "Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?").  No matter the cause, data continues to indicate that the farmland bubble is bursting.

2Q 2016 agricultural updates from the Federal Reserve Banks of Chicago, Kansas City and St. Louis indicate continued income, credit and farmland price deterioration for Midwest farmers.  Lender surveys also suggest that as many as 30% of Midwest farmers are having problems paying loan balances.  Declining asset values and incomes have also caused banks to tighten lending standards which has only served to accelerate the decline. 

In Kansas' 10th District (which includes MO, OK, KS, NE), values of non-irrigated and irrigated cropland declined 3% and 5%, respectively, in 2Q 2016.  In fact, 2Q 2016 marks the 6th consecutive quarter of YoY declines for irrigated cropland values.  Between 2002 to 2014, the value of both irrigated and non-irrigated cropland declined in only one other time in 3Q 2009.

Farmland Value

Farmland prices in Chicago's 7th District (IL, IN, IA, MI, WI) paint a similar picture.  Before price declines in 2014 and 2015, farmland prices in the 7th District had only declined YoY in 4 other years since 1965.

7th District

Any supply cuts that might be expected in this type of environment aren't having an impact on commodity prices at this point with wheat and corn prices both trading at multi-year lows.

 

Commodity Prices

 

Meanwhile farmer credit conditions continued to weaken in 2Q, per the Kansas City Fed:

Respondents to the Tenth District Survey of Agricultural Credit Conditions indicated farm income in the quarter continued to tighten. Nearly 75 percent of surveyed bankers reported farm income was less than a year ago, although the percent of bankers that reported weaker farm income declined slightly from the first quarter (Chart 1). Respondents also noted that agricultural producers continued to reduce capital and household spending as profit margins generally remained weak.

 

Bankers also indicated they expect farm income to remain weak in the third quarter. Similar to last year, a significant number of bankers in each District state expect farm income in the third quarter to be less than a year earlier (Chart 2). They also expect the rate of decline to be sharpest in the Mountain States and Oklahoma, which are relatively more dependent on income from wheat, cattle and energy production than other parts of the District. As the outlook in these three sectors has become increasingly downbeat, more bankers in those regions expect farm income to decline further.

Farm Income

Persistent declines in farm income in the District have continued to affect agricultural credit conditions. Demand for non-real estate farm loans and loan renewals continued to climb in the second quarter with additional increases expected in the third quarter (Chart 5). As noted in the Kansas City Fed’s most recent Agricultural Finance Databook, the rising demand for farm loans has been driven primarily by the need to finance short-term operating expenses as profit margins have remained weak.

Farmer Credit Condtions

Evidence of repayment problems also has surfaced at the state level. The share of farm loans with identified repayment problems has increased to at least 18 percent in all states (Chart 7). In the Mountain States, more than 30 percent of farm loans had some type of repayment problem, a jump of 17 percentage points from the 2011-13 average. Loan repayment problems also increased in other District states from the 2011-13 average, reflecting the effects of prolonged weakness in farm income throughout the District.

 

Loan Repayment

In response to a weakening farm economy and increased problems with loan repayments, bankers reported an increase in the share of loan applications that were denied in the second quarter. In 2016, almost 15 percent of bankers reported that they denied more than 10 percent of applications for farm operating loans (Chart 8). By comparison, only 5 percent of bankers indicated they had denied loan applications at this rate in 2015. Although District bankers continued to report that ample credit was available for borrowers who are in a strong financial position, the higher rate of loan denials suggests the number of farm borrowers who are less creditworthy has increased over the past year.

Farm Loans Denied

Time to stop all that silly farming... don't these people know we are in the 'new services economy' - pave all the fields and make Pokemon Go gyms...