The Housing Bubble

A report from the Star Tribune in Minnesota. “As farmers cut back, the doldrums caused by lackluster prices for crops and livestock have started to ripple onto the main streets of rural Minnesota. When farmers have less money to spend, it affects anyone who is selling farm equipment, marketing fertilizer, or building new barns, bins and sheds. Low commodity prices also put a squeeze on cash rents for land that many retired farmers or their families depend on for income. David Preisler, executive director of the Minnesota Pork Producers Association, said the direct effects of weak crop and livestock prices show up quickly in many small towns. ‘The first ripple effect you see is going to be any sort of capital purchases that are more discretionary in nature,’ he said.”

“The average spending for machinery and equipment in 2012 and 2013, when crop prices peaked, was about $117,000 per farm. That plummeted to about $67,500 in 2014 and $48,000 in 2015. Farm building purchases such as grain bins and hog barns had a similar drop-off, from about $36,000 per farm in 2013 to $21,000 in 2014 and $16,000 in 2015.”

“The report also found that fertilizer purchases fell more than 14 percent from 2013 to 2014 before rebounding slightly in 2015. And land rent, which typically lags behind the ups and downs of crop prices, increased in the two years after crop prices peaked, but last year fell about 3 percent.”

“AGCO, a major farm machinery manufacturer in Jackson, Minn., is feeling the pinch. Big machinery makers John Deere and Caterpillar also reported declines in sales due to softness in ag and construction markets. ‘The biggest driver of our business is definitely farm income,’ said Greg Peterson, AGCO’s director of investor relations. ‘So where commodity prices are certainly play a big part of that.’”

“Peterson said the company has adjusted to the pullback in business by cutting costs across the board and slowing production at its plant in southwestern Minnesota. That meant laying off about 10 percent of its workforce in 2015, he said, and another 10 percent in 2016. The plant currently employs about 850 workers, Peterson said.”

From Ag Week. “Midwest and Mid-South farm income and expenditures remained under pressure during the third quarter of 2016, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Looking ahead at the fourth quarter, proportionately more lenders indicated they expect values to decline for quality farmland and ranch or pastureland.”

“In contrast, year-over year cash rents for quality farmland dropped 6.1 percent during the third quarter. This followed a drop of 10 percent seen during the second quarter. Meanwhile, cash rents for ranchland or pastureland fell 3.9 percent in the third quarter, following a plunge of 20.7 percent in the second quarter. Rents for quality farmland and ranchland or pastureland are expected to continue to decline in the fourth quarter, the lenders said.”

“‘The financially conservative farmer is probably going to survive during this period of low grain and cattle prices. The young farmers with very little equity are really going to struggle,’ said a Missouri lender. ‘It looks like the corn yields are coming in exceptionally high, which will help everyone pay expenses. However, I think there will be very little left to purchase land, machinery, and other equipment.’”

From Agriculture.com. “Now that harvest is rapidly winding its way way to completion, many farm tenants and landowners will quickly turn their attention to cash rental rates for 2017. Cash rental rate decisions and discussions can often be challenging, especially in times of rapid commodity price changes. Data shows that the declines have now begun to accelerate, as the likelihood of sustained low commodity prices has taken hold. In 2016, cash-rental rates declined by 10.9%, the second-largest decline seen in the data. The only larger decline occurred in 1986 when rates fell by 11.2%.”

“Clearly, cash rents are working lower. Simply put, farm economics drive cash rental rates. If farm economics undergo a sustained period of decline, one should expect rents to follow. It appears that rents may have indeed overshot to the upside in the great commodity boom. As we noted in 2014, the cash rental rate adjustment can be significant in such situations. A number of factors will determine where things go from here. They include how long commodity prices remain depressed and whether the declines continue.”

“As we noted in 2014, government program payments will also play an important role. With payments set to start declining for crops planted in 2017, one might expect that this, too, will work against cash rental rates.”

From AgriMoney. “US farmland prices are heading for their ‘first significant correction since the mid-1980s,’ MetLife Agricultural Finance said, as official data showed that, on some measures, market conditions were already the worst since then. Meanwhile, separate data from the Fed’s Kansas City bank showed values in the central and southern Plains, from Nebraska to Oklahoma, falling by more than 6% year on year, at the quickest rate since early 1987.”

“The price fall in the July-to-September quarter ‘was the sharpest year-over-year reduction in the value of each type of farmland throughout the district since the mid-1980s,’ the Kansas City Fed said. ‘Evidence of steepening declines in farmland values was seen throughout the district.’”

From MarketWatch. “A fourth straight year of bumper corn and soybean harvests is nipping the per-bushel profit collected by farmers, and that makes the land they work worth less. In fact, the value of ‘quality’ farmland in the Chicago Federal Reserve’s jurisdiction fell again in the third quarter, down 3%, from last year’s third quarter. It’s the fourth straight quarter of year-over-year declines for land values in the district, which covers Illinois, Iowa, Indiana, Wisconsin and Michigan. It’s also its longest losing streak since 1986–87.”

“Indiana’s farmland values were up 1 percent from a year ago and Wisconsin’s were up 2 percent, while farmland values for Illinois fell 4 percent, Iowa fell 5 percent and Michigan dropped 11 percent, the Fed’s report issued Thursday showed. ‘Bumper harvests should provide some protection for farmers’ revenues, but falling corn prices have pulled the rug out from beneath their feet,’ said David Oppedahl, senior business economist at the Chicago Fed.”

“What’s more, the USDA this week raised its outlook for domestic corn stockpiles at the end of the 2016-17 season, pegging inventories at end-August 2017 at 2.403 billion bushels, which would be the largest in nearly three decades. The report also looked at credit conditions for farmers in the area. For the third quarter of 2016, most of the indicators of the Fed district’s agricultural credit conditions were more negative than those of a year ago.”

“According to responding bankers, hog, cattle and dairy farmers should also expect to face lower earnings moving into winter, which would make this the second year in a row with a negative outlook for all of them, the Chicago Fed said. In a separate report out Thursday, the Kansas City Fed reported a slow-but-steady rise in financial stress in its farm sector during the third quarter of 2016 as income in the sector remained low. The Kansas City Fed covers Kansas, part of Missouri, part of Nebraska, Oklahoma, Colorado, Wyoming and part of New Mexico.”

“‘Persistent weakness in both the crop and livestock sectors has caused producers to expend more working capital to meet short-term financial obligations,’ the Kansas City Fed’s Nathan Kauffman and Matt Clark said in the report. ‘An ongoing decline in farmland values and cash rental rates has accelerated slightly under prolonged pressure from falling farm income.’”

The Western Farm Press. “It’s no secret that the profitability of tree nuts is not what it was one or two years ago. With the decline came a softening of agricultural land values across California, according to a Rabobank report. What stood out to Roland Fumasi, lead author for the report titled ‘California Agricultural Land Values Outlook 2016′, when compiling information for the report was the run-up in prices for ‘marginal ground.’”

“‘The numbers showed the additional risk folks were willing to take by either paying high lease rates or paying high prices to put permanent crops into marginal-yielding ground,’ he said. ‘The point is it wasn’t just the best ground that participated in this rise.’ Fumasi is not entirely bearish as projections suggest a slowdown in the rate of decline among the various regions and in certain crops. ‘We’re just giving some of our earlier extraordinary gains back,’ he says.”

“Of note, Fumasi cautions while the current change could be termed a ‘correction,’ it is not a ‘bubble,’ or false economic beliefs that have come to roost because of ‘paper profits.’ Land value increases from 2010 to 2015 were ‘certainly supported by underlying profitability’ in various crops, Fumasi says. Nevertheless, the decline in land values at rates similar to what they rose will, in the short term, appear significant.”

The Southern Illinoisan. “Farmers treading water during a period of sluggish crop prices are getting little relief from their landlords. Average net farm income in Illinois plunged from $107,000 in 2014 to minus $3,000 last year, according to Farm Business Farm Management Association figures. ‘If you were a salaried person and had that kind of swing in your paycheck, how happy would you be? Not very,’ said Ruth Hambleton, who teaches ag economics at Southern Illinois University.”

“And it’s not like landholders are getting rich. Annual returns average only 2 to 6 percent of value in Illinois. ‘Cash rents follow the land values,’ Hambleton said. ‘Compare land values to the stock market. People don’t like the downward adjustment. They appreciate the incline we’ve been in since the 1990s.’”

“In Illinois, three-fourths of agricultural land is owned by someone other than the farmer. Statistically, cash leases are more common than crop-share agreements. That is a relatively recent phenomenon, as the balance tipped in 2006.”