henderson - usdamicrosoft powerpoint - henderson.pptx author jlohr created date 2/25/2013 11:40:31...

Jason HendersonVice President and Branch ExecutiveFederal Reserve Bank of Kansas City –Omaha Branchwww.kansascityfed.org/omahaFebruary 22, 2013

The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Federal Reserve Bank of Kansas City – Omaha BranchRegional, Public, Community Affairs Division www.kansascityfed.org/omaha

0 ‐ $499$500 ‐ $999$1000 ‐ $1999$2000 ‐ $2999$3000 and up

$Dollars per AcreConstant 2011 dollars

Nebraska and Iowa Farm Real Estate Values1900

Source: USDA


0 ‐ $499$500 ‐ $999$1000 ‐ $1999$2000 ‐ $2999$3000 and up



Source: USDA


0

500

1000

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3500

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0

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2000

3000

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1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Iowa (Left Scale)

Nebraska (Right Scale)

Iowa and Nebraska Farm Real Estate Values

Dollars per acre (2011 constant dollars)

Calculations based on USDA data


Demand Shocks: Persistent demand shocks lead to high land values and capital investment

Supply Shocks: Persistent supply shocks that lead to production expansions reduce prices

Interest Rate Shocks: Lower interest rates associated with higher incomes Lower interest rates yield lower capitalization rates


Corn Price (dollars per bushel)

$3.00 $4.00 $5.00 $6.00 $7.00 $8.00

3% 4,800 6,400 8,000 9,600 11,200 12,800

4% 3,600 4,800 6,000 7,200 8,400 9,600

5% 2,880 3,840 4,800 5,760 6,720 7,680

6% 2,400 3,200 4,000 4,800 5,600 6,400

7% 2,057 2,743 3,429 4,114 4,800 5,486

8% 1,800 2,400 3,000 3,600 4,200 4,800

Capi

taliz

atio

n Ra

te (

perc

ent)

Assumption corn yields 160bushels per acre

Capitalized Value Formula

30% of Expected Price * Yield

Expected Capitalization Rate

Net Present Values tell us that Land Values should equal expected capitalized revenues

According to USDA, land costs are projected to account for a quarter of total corn

production costs and a third of soybean production costs in 2012 and 2013


5

10

15

20

25

30

35

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Value‐to‐Ca

sh Ren

t Multiple

Value‐to‐Cash Rent Multiple for IA, IL, IN Cropland, 1967‐2011

IL IA INSources: IL and IA compiled from NASS Reports, IN from Purdue Land Value Survey


0

1

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3

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5

6

0

500

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1880 1900 1920 1930 1940 1950 1959 1969 1978 1987 1997 2007 2017

U.S. Farm Real EstateValues (Left Scale)

Corn Price ‐ 5 yearaverage (Right Scale)

Dollars per acre (Constant 2011 dollars)

U.S. Corn Prices and Farm Real Estate Values

Dollars per bushel

Source: USDA


050

100150200250300350400450

1910

1915

1920

1925

1930

1935

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1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Non‐real‐estate Debt

Real Estate Debt

Billion dollars (constant 2005 dollars)

Real U.S. Farm Debt

Source: USDA and Agricultural Finance Databook


Kansas Farmer Debt LevelsPercent of farmers

Source: Featherstone (2012)

KS Farm Management Farms:

Average Debt‐to‐Asset Ratio 1979 – 24.6% 2010 – 26.8%

Debt‐to‐Asset Ratio >40% 1979 – 19.4% 2010 – 25.6%

Debt‐to‐Asset Ratio >70% 1979 – 1.3% 2010 – 5.9%


The Wealth Effect in U.S. Agriculture

•With high wealth and low interest rates, farm capital investments remain strong.

•Farm leverage increases as farmers use debt not income to finance investments.

U.S. Farm Income and Capital Spending

Billions current 2005 dollars

Source: USDA


Booming incomes and low interest rates fuel record high farmland values.

Farm sector debt remains low, but it is concentrated.

The wealth effect is fairly strong in U.S. agriculture.

Will farmers resist the temptation of low interest rates and high land values and not leverage the farm?

For More Informationon

The Midwestern Economy and Rural America

www.kansascityfed.org/omaha

henderson - usdamicrosoft powerpoint - henderson.pptx author jlohr created date 2/25/2013 11:40:31...

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