Posted By Keith Good at FarmPolicy.com
Agricultural Economy- Fed Districts Note Land Values Soften
Jacob Bunge reported in today’s Wall Street Journal that, “Farmland values fell in the first quarter in much of the Midwest, the latest sign of a downturn in the market after a yearslong boom fueled by rising commodity prices, according to Federal Reserve reports on Thursday.
“Average prices for agricultural land in the Federal Reserve Bank of St. Louis’s district, which includes parts of Illinois, Indiana and Missouri, fell 6% in the first quarter from the prior quarter, the bank said [related graph].”
Mr. Bunge explained that, “Prices for nonirrigated farmland in the Kansas City Fed district, which includes Kansas and Nebraska, declined 1.4% over the same period. Meanwhile, the Chicago Fed reported a 1% quarter-to-quarter decline, the first in five years for a district that includes Iowa, Michigan and parts of Illinois and Indiana [related graph].
“The reports indicate the U.S. farmland market has softened further, after cooling last year as U.S. grain and soybean prices fell sharply amid large harvests. Farmers produced the biggest corn crop ever last autumn, just one year after the nation’s worst drought in decades drove prices for the grain to record highs. Corn futures prices at the Chicago Board of Trade have fallen 24% over the past 12 months.”
The Journal article stated that, “The slump in cropland values marks a turning point in the U.S. Farm Belt. From 2009 to mid-2013, average prices for farmland rose by half, according to federal data, reflecting one of the U.S.’s largest recent asset booms. The gains fueled concerns about a bubble, though economists have noted that farmers today carry relatively low debt levels.”
Mr. Bunge added that, “Agricultural lenders surveyed by the Kansas City Fed forecast that farmland prices in that bank’s district would continue to slide. ‘Expectations of lower profits for crop producers have generally halted the rise in District cropland prices,’ Kansas City Fed economists wrote [related graph].”
The Chicago Fed report also noted that, “It seems plausible that the drops in 2014 cash rental rates reflected lower expectations for profits in 2014 as crop prices fell last fall, which provided ammunition for farmers to negotiate lower rates for leases. According to data from the U.S. Department of Agriculture (USDA), corn prices were down 37 percent and soybean prices were down 8.5 percent in the first quarter of 2014 from a year ago, following a more plentiful harvest in 2013 than that reduced by drought in 2012.”
Also, the Kansas City Fed report pointed out that, “While lower corn and soybean prices dampened farm income expectations in crop-growing regions, the resulting reduction in feed prices helped improve profit margins for many livestock operators. During the first quarter, feed costs had dropped 10 percent from their peak in 2012, reducing breakeven costs for cattle and hog feeders (Chart 3). Furthermore, prices for fed cattle and hogs rose sharply amid tight supplies and strong export demand for beef and pork. Hog prices in particular jumped as an acute swine virus lowered annual production estimates. Feeder cattle prices have also strengthened amid exceptionally low inventory levels and strong demand to keep feedlots full (Chart 4). According to the USDA Economic Research Service (ERS), the value of cow/calf production less operating costs jumped 34 percent from 2012 to 2013. Following several years of challenges to profitability, nearly half of bankers surveyed noted a modest improvement in the financial condition of borrowers in the livestock sector.”
Meanwhile, the Federal Reserve Bank of Minneapolis noted yesterday (“Conditions remain tough for district farmers; cropland values moderating”) that, “Reduced crop prices and high input costs continue to take a financial toll on farmers and may be putting downward pressure on land prices heading into planting season, according to results of the Minneapolis Fed’s first-quarter (April) agricultural credit conditions survey. Farm incomes and capital spending decreased, according to lenders responding to the survey.”
Yesterday’s report noted that, “After several years of very strong growth, land prices have moderated in recent surveys, a trend that continued in the first three months of 2014. Values even decreased in some cases, along with cash rents. The average value for nonirrigated cropland in the district fell by almost 2 percent from the first quarter of 2013; irrigated land fell slightly (by less than 1 percent), while ranchland values increased nearly 8 percent, likely owing to solid livestock prices. The district average cash rent for nonirrigated land fell more than the value, by almost 4 percent from a year ago. Rents for irrigated land increased less than a percent, while ranchland rents jumped by 13 percent.”
Reuters writer Christine Stebbins reported yesterday that, “Tighter profit margins for crop producers were a drag on farm income in the first quarter despite improved profitability in the livestock sector with lower feedgrain prices.
“With lower income, more crop producers borrowed to pay for operating expenses and bankers reported an uptick in debt compared with last year. But concerns about a sharp drop in land values after last autumn’s 30 percent drop in corn prices appeared to be easing.”
More specifically on the livestock sector, USDA’s Economic Research Service indicated yesterday (“Livestock, Dairy, and Poultry Outlook”) that, “The continuing decline in feeder cattle supplies outside feedlots is reflected in record and near-record prices for all weights of feeder cattle. Relatively stronger feeder heifer prices suggest the possibility of the beginning of increases in cow inventories over the next few years. At the same time, current levels of cow slaughter reflect ongoing drought in the Plains, Southwestern, and Western United States, and drought could again interfere with any plans for expanding cow inventories.”
ERS noted that, “Pork production is expected to increase 2.9 percent next year as pork producers gain facility in managing Porcine Epidemic Diarrhea (PEDv).”
And yesterday’s report added that, “Milk production is expected to increase in 2015 compared with this year. Lower feed prices will improve the profit outlook for producers next year. Continued strong demand, both foreign and domestic, will moderate price declines in 2015.”
Eric Morath reported in today’s Wall Street Journal that, “Inflation is showing an early sign of picking up after years of dormancy, a shift that could reshape Federal Reserve policies forged during a period of persistently weak price pressures and widespread economic slack.
“The consumer-price index rose a seasonally adjusted 0.3% in April from the prior month, driven by increasing costs for staples such as gasoline, food and shelter, the Labor Department said Thursday. It was the strongest monthly gain since last June.”
The Journal article stated that, “Food costs, up 0.4% in April, have been a significant driver of inflation, increasing for four straight months. Meat prices last month posted their largest jump since 2003. A drought in California and illness among livestock are putting upward pressure on grocery-store prices.”
For more detail on yesterday’s CPI update and food prices, see this one-minute FarmPolicy.com video recap.
In other news, Bloomberg writer Brian K. Sullivan reported yesterday that, “California doesn’t have much chance for rain in the next five months, and its best opportunity to break the drought there may hinge on the emergence of an El Nino in the Pacific Ocean this year, U.S. forecasters said [see related graph yesterday from the Climate Prediction Center].
An update from the U.S. Drought Monitor this week noted that, “Kansas also saw a mixed bag this week with heavy but narrow bands of storms putting a small dent in the drought there, particularly in central Kansas where the D3 was trimmed, leaving D2 behind. Elsewhere in Kansas, though, the drought strengthened its grip and was accompanied last week by well above normal temperatures, leading to an expansion of D4 into the extreme southwestern reaches of the state to the Oklahoma border.
“Oklahoma also felt those hotter temperatures along with some below-freezing readings late in the period, leading to more damage to the winter wheat crop, which has felt the brunt of a cold winter and coinciding drought. However, heavy rains did fall across the southeast corner of the state, bringing some 1-category improvement there [related graph].”
Meanwhile, Rong-Gong Lin II reported on the front page of yesterday’s Los Angeles Times that, “For years, scientists have wondered about the forces that keep pushing up California’s mighty Sierra Nevada and Coast Ranges, causing an increase in the number of earthquakes in one part of Central California.
“On Wednesday, a group of scientists offered a new, intriguing theory: The quakes are triggered in part by the pumping of groundwater in the Central Valley, which produces crops that feed the nation.”
The article noted that, “Groundwater is very heavy, and its weight depresses the Earth’s upper crust. Remove the weight, and the crust springs upward — and that change in pressure can trigger more small earthquakes, the researchers said.”