CHICAGO, Ill. — Lower land values and declining farm incomes may stir memories of past farm crises. But farm banks across the Midwest report good financial health and available credit for farms in the coming year.
Reports of declining cropland values continue across the Corn Belt. Ag lenders surveyed by the Federal Reserve Bank of Chicago reported a 3 percent drop in the value of "good" farmland in 2014. Half the bankers surveyed – in Iowa, northern Illinois, northern Indiana and the southern parts of Wisconsin and Michigan – expected farmland values to decline more this spring.
But today’s land value declines do not have the impacts of those during the farm crisis of a generation ago. "The run-up in farmland values so far is not a credit-driven event," stated the 2014 Farm Bank Performance Report, published last month by the American Bankers Assoc. (ABA).
According to the report, asset quality at the nation’s farm banks improved during 2014. Non-current loans – those more than 90 days past due – declined to 0.5 percent of loans held by farm banks, back to the pre-recession level. Farm banks are well positioned to meet the needs of their customers in 2015, the ABA said.
A big reason for better ag bank health today over 30 years ago is a change in lending practices. "It’s different than the 1980s because banks are lending on cash flow instead of collateral," explained Wayne Mattingly, an ag lender at Independence Bank in Owensboro, Ky.
Farm lenders focus on cash flow – the farm’s ability to service its debt from farm income – rather than justifying loans based on the collateral value of financed purchases.
Cash flow lending leaves banks less exposed to drops in land values. Mike Duffy, retired Iowa State University extension economist, reported the largest percentage drop in Iowa farmland values since 1986 last year – 8.9 percent per acre, according to the Iowa Land Value Survey.
Similar surveys across the region report such drops in cropland values, though pasture and timber values are, in some places, still increasing.
Duffy, who came to ISU in the midst of the 1980s farm financial crisis, said Iowa’s land value decline is different than the drop 30 years ago. High-grade farmland had appreciated faster in value than lower-quality land, he explained, and high-grade farmland values declined faster as grain prices dropped.
"Commodity prices and farm income are settling back to more expected levels, and I think land values will probably move sideways for a while," he said.
Cropland values are always locally variable, too. In the Owensboro-Evansville, Ind., area, according to Mattingly, land values are holding steady. "We recently saw cropland bring $9,000 to $10,000 per acre at auction," he said.
But such sales are also different from the 1980s, according to the ABA report: Land buyers are financing purchases with cash and existing equity, rather than the collateral of the land purchase.
