Irrigated cropland values surge with drought
Persistent drought sparked a rush in irrigated farmland sales during the fourth quarter of 2012, according to the quarterly survey of agricultural credit conditions by the Federal Reserve Bank of Kansas City.
Stronger sales vaulted irrigated cropland values in the Fed's Tenth District 30 percent above year-ago levels, with a 13 percent jump in the fourth quarter alone. Cash rental rates for irrigated cropland also surged more than 20 percent from a year ago, as landowners factored in high farm incomes on land with consistent access to water when renegotiating lease terms, according to the survey compiled by KC Fed economists Nathan Kauffman and Maria Akers.
Farmers were the predominant buyers of farm real estate and placed a premium on irrigated land due to water scarcity stemming from drought. Non-irrigated cropland and ranchland also posted strong annual gains between 20 and 25 percent.
Farmland values rose with stronger-than-expected farm incomes. High pre-harvest crop prices lifted incomes, especially for farmers on irrigated land, while crop insurance payments compensated for yield losses on non-irrigated land. A post-harvest decline in crop prices and strengthening cattle and hog prices improved livestock profitability as losses narrowed.
Although fourth-quarter incomes were better than expected, bankers expressed concerns that drought could affect some areas further in coming months, the survey said. Farm incomes were expected to drop in Kansas and Oklahoma, as pasture conditions generally remained poor due to ongoing drought. But strong farm incomes were expected to continue in areas with sufficient water availability.
During the fourth quarter, higher farm incomes boosted capital spending and led to improved agricultural credit conditions. Capital spending rebounded in the fourth quarter, although overall loan demand remained low. Expectations for capital spending in the coming months varied, however, in a pattern similar to farm incomes.
Bankers generally expected that areas still experiencing drought would make fewer capital improvements in early 2013. Loan repayment rates increased at the pace of the previous year, and fewer banks reported making referrals to correspondent banks. Interest rates for both operating and real estate loans continued to edge down.
District farmland values surged at the end of the year with strong demand for irrigated cropland. Both irrigated and non-irrigated cropland values posted year-over-year gains of more than 20 percent for the seventh consecutive quarter, according to survey respondents. Ranchland values surged nearly 20 percent.
Irrigated cropland sold particularly well, as severe drought led to higher crop prices, bolstering incomes for farmers with steady access to water. Since the onset of the 2011 drought, annual gains in irrigated cropland have outpaced gains in non-irrigated cropland by three percent on average. Prior to the 2011 drought, the value of both types of cropland rose at approximately the same rate.
Farmland values posted strong quarterly gains as experienced farmers continued to expand their operations. With robust demand, irrigated and non-irrigated cropland values jumped 13.1 percent and 9.1 percent from the previous quarter, respectively, despite the rise in land sales driven by concerns regarding potential changes in capital gains and estate tax policies.
According to banker contacts, farmers accounted for 74 percent of farmland sales in 2012 and used more cash to finance purchases, compared with a year earlier. Non-farmers continued to purchase land predominantly for investment purposes, the survey said.
After falling for four straight years, bankers reported more nonfarm purchases for recreation and residential/development purposes. However, bankers noted that young and beginning farmers were having difficulties acquiring land at today's high prices due to their holding less equity.
Cash rental rates for farmland also surged in the fourth quarter, as landowners renegotiated lease terms. Annual cash rental rates for irrigated and non-irrigated cropland rose 20.1 percent and 14.6 percent, respectively, amid expectations of high farm incomes partly supported by crop insurance. Cash rental rates for ranchland also jumped by 12.9 percent, supported by rising cattle prices.
Tenth District farm income
District farm incomes rebounded in the fourth quarter despite expectations that drought might keep profits subdued. Crop incomes remained high, as farm operations with irrigated cropland had less yield loss and sold crops at high prices, while many farm operations without irrigation received crop insurance payments, mitigating losses.
Following the harvest season, crop prices fell, as export demand weakened and ethanol production slowed. Weaker crop prices provided some relief to livestock operators through lower feed costs. Firming prices for cattle and hogs also improved profitability in the livestock sector toward the end of the quarter.
Water scarcity led to differing farm incomes and farmland-value gains by state. With significant irrigated acreage, Nebraska led the District in farm incomes last quarter, according to bank contacts, the survey said.
Irrigated cropland values rose more than 30 percent from a year ago in Nebraska, Kansas, and the mountain states. Ranchland values surged more than 25 percent from the previous year in Kansas and Nebraska, as an ongoing lack of rainfall constrained the availability of quality pastures.
Farm income expectations also varied widely by state as bankers remained concerned that the effects of the drought might persist into 2013. Severe drought continued to linger in the District despite a substantial improvement in conditions east of the Mississippi River.
Although crop prices have fallen from their 2012 peaks, bankers indicated that the price of livestock forage has remained high due to scarce feed supplies and dry pastures. Survey respondents expected significantly lower incomes in Kansas and Oklahoma over the next three months with slight gains in Nebraska.