Not so long ago, US farmland, whose prices were until recently rising exponentially, was considered by many to be the next asset bubble. Then, exactly one year ago, the fairy tale officially ended, and as reported in February, US farmland saw its first price drop since 1986. It was also about a year ago when looking ahead, very few bankers expected price appreciation and more than a quarter of survey respondents expect cropland values to continue declining.
They were right.
According to several regional Fed reports released last Thursday, real farmland values in parts of the Midwest fell at their fastest clip in almost 30 years during the first quarter.
This is how the Chicago Fed described the increasingly dire situation:
Agricultural land values in the Seventh Federal Reserve District fell 4 percent from a year ago in the first quarter of 2016—their largest year-over-year decline since the third quarter of 2009. Cash rental rates for District farmland experienced a significant drop of 10 percent for 2016 compared with 2015—even larger than the decrease of last year relative to 2014. Demand to purchase agricultural land was markedly lower in the three- to six-month period ending with March 2016 compared with the same period ending with March 2015. Moreover, the amount of farmland for sale, the number of farms sold, and the amount of acreage sold were all down during the winter and early spring of 2016 compared with a year ago. Nearly two-thirds of the responding bankers expected farmland values to decrease during the second quarter of 2016, with the rest expecting farmland values to remain stable.
As the WSJ added, falling crop prices have weighed on land values from Kansas to Indiana over the past two years as farm income declined and investors who had piled into the asset at the start of the decade retrenched.
Three regional Federal Reserve banks all reported year-over-year declines in farmland values in their districts and said the drops would continue, though their forecasts were based on surveys taken before the recent rally in corn and soybean prices.
The St. Louis Fed region that includes parts of the U.S. agricultural heartland in Illinois, Indiana and Missouri reported the steepest decline, with the average price of “quality” farmland falling 6.4% in the quarter, the biggest decline since its survey began in 2012. The Chicago Fed said prices for similar land in its district fell 4% from a year ago, the seventh successive quarterly decline. Adjusted for inflation, prices in an area that includes parts of Illinois, Indiana, Iowa, Michigan and Wisconsin fell 5%, the biggest quarterly drop since 1987.
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