Farm real estate values increased considerably in 2022 but softened in the final months of 2022 as interest rates rose sharply, said Economists Cortney Cowley and Ty Kreitman of the Federal Reserve Bank of Kansas City in a release.
Farm loan interest rates jumped to decade highs alongside increases in the federal funds rate, Cowley and Kreitman said. While the value of most types of farmland continued to rise, the increase was the slowest since early 2021.
Fourth-quarter agricultural credit conditions remained strong and continued to be bolstered by broad strength in the farm economy throughout 2022, the economists said.
OUTLOOK REMAINS STRONG
The 2023 outlook for agricultural credit conditions also remained generally positive, despite some ongoing concerns, the Federal Reserve said. Elevated commodity prices continued to support profit opportunities for many farmers, but concerns about operating expenses, higher interest rates and intense drought persisted.
While improvement in farm income and credit conditions softened slightly in recent months, farm finances remained strong following especially strong agricultural economic conditions the past two years, they said.
The average interest rate charged on agricultural loans at banks in reporting Federal Reserve districts increased nearly 150 basis points from the previous quarter and were about 300 basis points higher than the same time a year ago, the economists said. Rates rose to the highest level since 2008 and pushed financing costs considerably.
LAND VALUES GROW SLOWER
The value of non-irrigated cropland increased by an average of 15% from the previous year across all regions, following growth of more than 20% in early 2022, the Bank said. The average value of cropland was unchanged from the previous quarter in the Chicago and Kansas City Districts, but increased at a pace similar to the past year in the Dallas and Minneapolis regions.
Benchmark interest rates surpassed returns to farmland owners in recent months, which could pressure growth in farmland values going forward, they said. Capitalization rates, calculated as the ratio of cash rents to farmland values, have decreased continuously over the past 15 years.
In the Kansas City region, capitalization rates fell from 5.4% in 2009 to 3% at the end of 2022, the release said. Farmland returns have been comparatively lower in the Dallas region and recently fell below 2%.
Conversely, risk-free rates of return rose dramatically in 2022, and the average yield of a 3-month Treasury was 4.2% at the end of the year, the economists said.
Strong farm income supported agricultural credit conditions throughout the year, but improvement softened in some regions, notably in the Kansas City and St. Louis Districts.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers last week ranged from $161.55 to $167.74 per cwt, compared with the previous week’s range of $164.13 to $166.59. FOB dressed steers, and heifers went for $258.70 to $266.29 per cwt, versus $258.17 to $264.02.
The USDA choice cutout Friday was down $0.60 per cwt at $283.35 while select was up $0.68 at $272.44. The choice/select spread narrowed to $10.91 from $12.19 with 55 loads of fabricated product and 24 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.60 to $1.70 a bushel over the May corn contract. Bids in Kansas were steady at $0.75 over May, which settled at $6.34 1/4 a bushel, up $0.01 1/2.
The CME Feeder Cattle Index for the seven days ended Thursday was $187.87 per cwt, down $0.84. This compares with Friday’s Mar contract settlement of $188.85 per cwt, down $0.65.