US farmland prices to suffer 20% slump, MetLife warns

11.11.2016
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.
 
US land prices will fall by an average of 20% from their peak – typically set early last year – before the slump peters out in 2018, said MetLife, one of North America's largest agricultural mortgage lenders, blamed the decline on weaker farm profits.
 
While interest rates, one big determinant of farmland market fortunes, look likely to "remain low", cash receipts, that is income from produce sales, look set to remain depressed by the dent to prices from weak crops.
 
While corn and oilseed prices "will bottom" in the current 2016-17 marketing year, "we expect the low price environment to persist through 2017", given the record size of this-year's US corn and soybean harvests, MetLife said.
 
"As the world has increased output to meet demand, commodity prices have adjusted lower," the lender said.
 
"Declining cash receipts will lead to a reduction in inflation-adjusted farmland values by 2018, representing the first significant correction since the mid-1980s."
 
'Steepening declines'
 
The comments came even as data from the Federal Reserve, the US central bank, showed prices in Midwest states including the so-called "I" states of Illinois, Indiana and Iowa falling by 3% in the year to the July-to-September quarter.
 
The period "marked the fourth straight quarter of year-over-year declines" for farmland in the region, "the first time for such a streak since 1986–87", the Fed's Chicago bank said.
 
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."
 
'Prolonged pressure'
 
The central bank reports also flagged the role of weak crop prices in undermining the market, with Kansas City officials reporting that both "agricultural credit conditions and farmland values deteriorated more rapidly under prolonged pressure from low commodity prices and tight profits margins".
 
And they proved downbeat over prospects too, with bankers in the Plains saying "they expect farm income, farmland values and repayment rates to dip further in the coming months".
 
In the Midwest, the Chicago Fed said that 58% of lenders surveyed forecast values extending their decline to the end of 2016, compared with fewer than 1% predicting an increase.
 
"Additionally, respondents forecasted weaker demand to acquire farmland this fall and winter compared with a year ago, particularly among farmers but also among non-farm investors."
 
'Not as bad this time'
 
However, MetLife said that the market would not stage the kind of "crisis" seen in the 1980s, when a sharp rise in interest rates fuelled a 42% collapse in US land prices, peak to trough.
 
"The crisis in the 1980s was a product of policies that incentivised the sector to take on excessive leverage and an abrupt change in monetary policy that caused interest rates to rise," the lender said.
 
"This is not the case today."
 
Instead, the market would stage what it termed a "moderate repricing of farmland, better aligning farmland values with cash receipt expectations".
 
And prices may after 2018 stage a rebound, of 6% by 2020, as a recovery in agricultural commodity prices feeds through into higher cash receipts.
 

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