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Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City – Omaha Branch www.kansascityfed.org/omaha February 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.

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Page 1: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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.

Page 2: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

Page 3: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1920

Source: USDA

Page 4: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1930

Source: USDA

Page 5: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1940

Source: USDA

Page 6: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1969

Source: USDA

Page 7: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1974

Source: USDA

Page 8: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1978

Source: USDA

Page 9: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1982

Source: USDA

Page 10: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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 Values1987

Source: USDA

Page 11: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

0

500

1000

1500

2000

2500

3000

3500

4000

0

1000

2000

3000

4000

5000

6000

7000

8000

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

Page 12: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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

Page 13: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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

Page 14: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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

Page 15: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

0

1

2

3

4

5

6

0

500

1000

1500

2000

2500

3000

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

Page 16: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

050

100150200250300350400450

1910

1915

1920

1925

1930

1935

1940

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

Page 17: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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%

Page 18: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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

Page 19: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

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

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?

Page 20: Henderson - USDAMicrosoft PowerPoint - Henderson.pptx Author jlohr Created Date 2/25/2013 11:40:31 AM

For More Informationon 

The Midwestern Economy and Rural America

www.kansascityfed.org/omaha