Prepared By: T. Harold Derrick

Chief Appraisal Specialist and Senior Examiner

December 1999
Table of Contents

Executive Summary 1

Background 2

Real Estate Trends and Analysis 3

Emerging Risk Considerations 6

Attachments

Trends for Average Value Per Acre 1

1999 Ag Real Estate Values 2

States with Highest Real Estate Growth Rates 3

Corn Belt States 4
1

U. S. Agricultural Real Estate Trends – Executive Summary

Agricultural real estate values remain stable. The positive national trend reflects

steady improvements in general agricultural productivity and growth of land

values in line with the U.S. inflation rate. Studies conducted by the United States

Department of Agriculture (USDA) for the period from 1994 through 1998

provided the historical trend information on agricultural real estate values.

Information for 1999 was obtained from the Farm Credit System’s (FCS or

System) chief appraisers to validate current trends in values, land rents and sales

activity. These appraisers are accredited professionals and actively involved in

the System’s current appraisal processes. The System’s chief appraisers indicated

no significant decline in average agricultural real estate prices or land rents, but

there is a general decline in the number of farm land sales.

System appraisers reported that steady consolidation into larger, more efficient

farm units and the significant growth of non-farm interests in agricultural real

estate were additional factors supporting continued stability. Each of these factors

is stronger today than they were during the 1980s, when agricultural real estate

values plummeted. However, current low commodity prices could place

downward pressure on agricultural real estate values and thus increase the risk in

FCS institution portfolios by reducing farmer equity and tightening the loan-tocollateral margins. This downward effect will be most pronounced in those areas

or regions where non-farm influences are at a minimum. However, lending

practices have evolved substantially since the 1980s and the overwhelming

majority of FCS institutions have written loan underwriting standards that require

loans to have adequate cash flows, sufficient equity, and reasonable margins for

future adversity. While loan-to-collateral ratios are still measured and included as

part of most underwriting standards, this is seldom the only factor considered for

loan approvals. In addition to these sources, the Federal Government’s recent

approval of $8.7 billion in additional financial assistance to farmers will help

maintain stable real estate values.
2

Background

Conditions that led to the farm crisis of the 1980s should be remembered. If

commodity prices remain low and the financial condition of farmers worsen,

monitoring changes and trends in the value of agricultural real estate could

provide an early warning mechanism of emerging risk in System institutions.

Agricultural real estate comprises approximately 80 percent of the total net worth

of America’s farmers; therefore, any significant downward movement in land

values will adversely impact farmer balance sheets and may result in lower

quality loan portfolios. In addition, conditions during the farm crisis of the 1980s

reveal the impact that changes in the value of agricultural real estate can have on

System institutions and their borrowers. The rapid decline in the value of

agricultural real estate during that period was a critical factor contributing to the

System’s loan losses. However, current real estate trends have not approached

either the rate of growth or decline seen in the 1980s.

System institutions placed a high reliance on loan-to-collateral ratios during the

rapid loan growth period from 1977 through 1983. Much of the growth during

this period occurred because of liberal lending practices to borrowers whose

financial net worth was comprised of appreciated real estate. In many other cases,

loans were made to borrowers that did not have sufficient repayment capacity

because collateral was used as a substitute for cash flow to justify the loan

decision. As long as collateral values kept increasing, FCS institutions financed

troubled borrowers and reported them as performing loans of acceptable quality.

This lending practice was accepted during that era because the borrower’s debts

were refinanced within the 85 percent loan-to-value criteria for farm mortgage

lending.

Low commodity prices and increased interest rates ultimately stressed the cash

flows needed to support the debt on real estate. The resulting decline in real

estate values caused many FCS institutions to recognize substantial loan losses

beginning in 1984. Total System losses recorded during this period (prior to any

subsequent recoveries) exceeded $4.2 billion and real estate land values declined

by over 50 percent in many states, especially in the Midwest. The liberal lending

practices and collateral-based lending practices that led to the farm crisis of the

1980s must not be repeated. Compared to the 1980s, most System institutions

today follow lending practices that include adherence to formal loan underwriting

standards and sound credit administration emphasizing repayment capacity and

adequate cash flows. Additionally, FCA examinations encouraged FCS

institutions to base their current loan decisions on sound analysis considering all

credit factors and not merely relying on a low loan-to-collateral ratio.
3

Real Estate Trends and Analysis

USDA studies and FCS chief appraisers provide information on states/regions

that require monitoring. To supplement knowledge of specific land values trends

for the territories serviced by System institutions, an overview of statewide and

regional land value trends was developed. It provides the basis to anticipate

worsening conditions in agriculture and support for individual examination

findings. A database using historical USDA and current FCS supplied national

information was developed to increase awareness of these regional and statewide

trends. Data for the period from 1994 through 1998 was based on USDA reports

of agricultural land values. The 1999 information was obtained through a survey

of FCS district chief appraisers and conversations with other FCS appraisers at the

System’s 1999 RAAW Conference. This information is included in Attachment

#1.

The value of U. S. agricultural real estate continues to increase. As shown in

the real estate trend database, cumulative U.S. agricultural real estate values have

risen on average by 17.5 percent for the 4-year period ending December 31, 1998.

During that period, the greatest land value growth was in 3 regions of the country

- the Corn Belt, the Lake Region, and Appalachia. These areas cumulatively have

risen over 23.5 percent during the period – which was 35 percent higher than the

national average. Most noteworthy, the States of Idaho, Indiana, Iowa, Michigan,

Minnesota, Nevada, and Tennessee (Attachment #3) have shown the greatest

percentage increases from 1995 through 1998. However, while the current land

value trend for 1999 remains positive, the rate of increase for five of these states

has slowed down significantly from the prior 4-year period, and Minnesota has a

decline for 1999. Indiana’s growth rate for 1999 has actually increased from

1998, but it still remains lower than the 4-year average. These are several of the

same Midwestern states that had some of the highest real estate value declines

during the farm crisis of the 1980s. These are also regions where FCS institutions

incurred substantial losses. In addition, FCA’s June 30, 1999 Stress Analysis

Report identified 6 associations that cover territory either in or adjacent to these

states where the prospect for continued stress is projected to adversely affect their

respective loan portfolios.

The Lake Region and Appalachia 1 have significantly more non-farm influences

that affect the value of agricultural real estate in their respective region.

Appraisers from both areas reported that recreational and residential buyers are

increasingly active in the rural land market. This group of buyers is larger now

than in previous periods and has demonstrated a willingness to purchase

agricultural real estate for other purposes. Also, this group has influenced the

increased value of farm real estate during the 1990s. These buyers are expected

 

1

 The effect of recent major flooding in the eastern 1/3 of North Carolina on rural real estate was

not considered for this analysis.
4

to continue putting upward pressure on land values and they have the cash

resources from off-farm income to support higher land values than those justified

for strictly agricultural uses. These regions are not affected by many of the

agricultural-related pressures noted in the Corn Belt and therefore are not as

vulnerable to the effects of low commodity prices.

According to FCS appraisers and based on district trends, increases in agricultural

land values continued in all regions of the U. S. for 1999, except for the Corn Belt

(Attachment #2). On a state-by-state basis, the greatest increases during 1999

were reported in Wisconsin, Mississippi, Louisiana, and California. Declines

were reported in North Dakota, Illinois and Minnesota. Furthermore, a number of

states, primarily in the Corn Belt region, had substantially no change in land

values from 1998.2

Agricultural land rental rates and terms are not increasing. FCS appraisers

indicated that 1999 rents were relatively unchanged from 1998 (Attachment #2).

Agricultural rents and terms are indicators of the income producing capacity of

the land and one of the primary components for determining the appraised value

of real estate. However, System appraisers in the Northwest states reported a 10

percent decline in general rental rates and/or terms for agricultural land in their

territory. These lower land rents indicate farmer expectations in that territory for

lower incomes from the units being rented. It is reasonable to conclude that these

expectations are linked with the current low commodity prices for grain and

livestock. Declines in real estate rental rates tend to be a leading indicator in a

declining farm real estate market and, if this trend continues, lower income

expectations will have a negative impact on the current market value of farm land.

Number of farm land sales decreasing in 1999. Most FCS appraisers reported

significant decreases in the number of agricultural land sales compared to the

previous year and no area of the country reported any increase in the number of

sales (Attachment #2). Land sales are important indicators of market activity and

declining sales were a leading indicator of lower land values in the 1980s. This

may be a predictor of what may be forthcoming. Declines in the number of sales

were significant in the Texas District and in the Corn Belt region serviced by

associations in both the AgAmerica and AgriBank Districts.

Another indicator of the declining trend in the number of farmland sales can be

seen in current auctions held by retiring farmers. FCA examiners reported that

many retiring farmers, especially in the Midwest, are selling their farm

equipment, but not their farm real estate, as they get out of business. Farmers

who retire with sufficient equity to retain their land will reduce the number of

 

2

 Some of the FCS appraisers specifically identified land sales for geographic regions and states;

however, some appraisers only reported land sales and trends on a district-wide basis. The

district-wide information sales information was extrapolated for each state to be consistent with

the USDA data.
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properties available for sale and be a contributing factor for the decline in the

number of sales.

The highest concern regions are the Corn Belt and the Northwest. Based on the

information provided by USDA and FCS appraisers, regions of the country that

merit additional attention are those Midwest states that comprise the Corn Belt

and the states in the Northwest. These areas comprise the AgriBank and

AgAmerica Districts. Both areas have experienced significant declines in the

number of farm sales and a flat-to-declining land rent trend. Actual rural property

sales in these areas for 1999 do not indicate lower land values except for slight

declines in Illinois and Minnesota. Land sales in those states are not yet

indicative of a material adverse trend; however, closer scrutiny to local conditions

and increase monitoring of institutions serving those areas is warranted. The

Corn Belt (see Attachment #4) is important because land values in that region

experienced growth rates during the 1990s at rates higher than national averages.

The average annual growth rate for the Corn Belt was 5.9 percent/year compared

to 4.4 percent/year for the nation as a whole (35 percent higher). In addition, this

was the region that experienced some of the System’s greatest losses during

1980s.
6

Emerging Risk Considerations

Risks for future agricultural land value declines are on the horizon, yet current

conditions do not warrant undue alarm. The rate of increase in agricultural land

values has slowed significantly since the beginning of 1998 and current trends in

the number of land sales may indicate a future decline in the value of agricultural

real estate. These trends are somewhat mitigated by the dramatic increase in

Federal disaster assistance granted to farmers in 1998 and again in 1999. Direct

assistance payments to farmers will provide additional cash flow to meet farm real

estate debt payments and support stability for future real estate values.

Information in the attachments that show trends in real estate values along with

FCA’s Early Warning System and other macro-economic sources can assist

monitoring and analysis of risk in FCS institutions. There have been substantial

changes in FCS lending practices since the last period of the agricultural real

estate decline in the 1980s and FCA examiners routinely monitor and rate

institution conditions and performance. Increased emphasis on underwriting

standards, sound credit administration and management accountability has

strengthened System asset quality. These changes in System lending practices

and controls should help insulate institutions from excessive risk if real estate

values experience any significant future declines. Nonetheless, institutions must

be aware that competitive pressures for farm loans, low commodity prices and a

rising interest rate environment will place additional stress on their portfolios.

System institutions must recognize any downward trends in land values and

appropriately structure individual loans and adequately provide for any emerging

risks.
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8

1994 to 1998 1999 to Date

Percent Percent Percent Percent Percent Sales Percent

STATE 12/31/94 12/31/95 Change 12/31/96 Change 12/31/97 Change 12/31/98 Change Change Change**ALABAMA 1,260 1,320 4.76% 1,360 3.03% 1,440 5.88% 1,490 3.47% 18.25% 5.50%FLORIDA 2,110 2,150 1.90% 2,200 2.33% 2,240 1.82% 2,260 0.89% 7.11% 3.00%GEORGIA 1,260 1,360 7.94% 1,430 5.15% 1,510 5.59% 1,560 3.31% 23.81% 3.00%SOUTH CAROLINA 1,340 1,360 1.49% 1,400 2.94% 1,480 5.71% 1,520 2.70% 13.43% 3.00%Southeast 1,520 1,580 3.95% 1,630 3.16% 1,700 4.29% 1,740 2.35% 14.47% 4.40%ARKANSAS 983 1,010 2.75% 1,070 5.94% 1,150 7.48% 1,180 2.61% 20.04% 2.10%LOUISIANA 1,080 1,180 9.26% 1,190 0.85% 1,210 1.68% 1,200 -0.83% 11.11% 11.00%MISSISSIPPI 886 917 3.50% 980 6.84% 1,050 7.14% 1,080 2.86% 21.87% 13.00%Delta States 973 1,020 4.83% 1,070 4.90% 1,130 5.61% 1,150 1.77% 18.19% 8.70%OKLAHOMA 547 547 0.00% 570 4.14% 610 7.02% 610 0.00% 11.45% 3.00%TEXAS 525 540 2.86% 554 2.59% 593 7.04% 595 0.34% 13.33% 3.00%Southern Plains 529 541 2.27% 557 3.01% 596 6.95% 598 0.34% 13.04% 3.00%ARIZONA 840 880 4.76% 920 4.55% 987 7.28% 1,020 3.34% 21.43% 3.00%COLORADO 520 558 7.30% 590 5.64% 618 4.75% 630 1.94% 21.04% 3.00%IDAHO 840 900 7.14% 960 6.67% 1,020 6.25% 1,060 3.92% 26.19% 2.00%MONTANA 277 289 4.50% 291 0.58% 294 1.03% 296 0.68% 6.91% 2.00%NEVADA 289 332 15.00% 366 10.11% 392 7.10% 405 3.32% 40.12% 3.00%NEW MEXICO 209 212 1.44% 215 1.42% 217 0.93% 219 0.92% 4.78% 3.00%UTAH 710 740 4.23% 780 5.41% 807 3.46% 815 0.99% 14.79% 3.00%WYOMING 192 206 7.30% 215 4.51% 222 3.26% 220 -0.90% 14.75% 0.00%Mountain 362 383 5.80% 399 4.18% 415 4.01% 422 1.69% 16.57% 2.75%CALIFORNIA 2,220 2,400 8.11% 2,500 4.17% 2,610 4.40% 2,630 0.77% 18.47% 10.00%OREGON 844 928 9.90% 960 3.46% 960 0.00% 970 1.04% 14.88% 2.00%WASHINGTON 1,070 1,120 4.67% 1,160 3.57% 1,190 2.59% 1,200 0.84% 12.15% 2.00%Pacific 1,540 1,670 8.44% 1,730 3.59% 1,780 2.89% 1,800 1.12% 16.88% 4.70%48 STATES 844 887 5.09% 926 4.40% 974 5.18% 992 1.85% 17.54% 3.54%* Information based on USDA data** Farm Credit System Reported 1999 Ag Land Sales
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TRENDS FOR AVERAGE VALUE PER ACRE BY REGION

U.S. FARM REAL ESTATE -- DECEMBER 31, 1994-1999*

1994 to 1998 1999 to Date

Percent Percent Percent Percent Percent Sales Percent

REGION 12/31/94 12/31/95 Change 12/31/96 Change 12/31/97 Change 12/31/98 Change Change Change**Northeast 2,200 2,220 0.91% 2,240 0.90% 2,280 1.79% 2,320 1.75% 5.45% 3.00%Lake 1,050 1,130 7.62% 1,200 6.19% 1,280 6.67% 1,320 3.13% 25.71% 6.92%Corn Belt 1,430 1,510 5.59% 1,610 6.62% 1,730 7.45% 1,770 2.31% 23.78% 3.40%Northern Plains 453 463 2.22% 481 3.84% 499 3.80% 505 1.19% 11.50% -0.50%Appalachian 1,430 1,550 8.39% 1,630 5.16% 1,720 5.52% 1,780 3.49% 24.48% 3.70%Southeast 1,520 1,580 3.95% 1,630 3.16% 1,700 4.29% 1,740 2.35% 14.47% 4.40%Delta States 973 1,020 4.83% 1,070 4.90% 1,130 5.61% 1,150 1.77% 18.19% 8.70%Southern Plains 529 541 2.27% 557 3.01% 596 6.95% 598 0.34% 13.04% 3.00%Mountain 362 383 5.80% 399 4.18% 415 4.01% 422 1.69% 16.57% 2.75%Pacific 1,540 1,670 8.44% 1,730 3.59% 1,780 2.89% 1,800 1.12% 16.88% 4.70%48 STATES 844 887 5.09% 926 4.40% 974 5.18% 992 1.85% 17.54% 3.54%* Information based on USDA data** Farm Credit System Reported 1999Ag Land Sales
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Attachment #3

States with Highest Real Estate Growth Rates

Since 1995

State 1995 1998 1995-1998 Average 1999 Sales

RE Value RE Value Percent Annual Percent Change

per acre per acre Change Growth Since 1998*

Nevada 289 $ 405 $ 40.1% 10.0% 3.0%Tennessee 1,340 $ 1,870 $ 39.6% 9.9% 3.3%Indiana 1,620 $ 2,110 $ 30.3% 7.6% 6.0%Michigan 1,330 $ 1,730 $ 30.1% 7.5% 4.0%Idaho 840 $ 1,060 $ 26.2% 6.6% 2.0%Iowa 1,350 $ 1,700 $ 25.9% 6.5% 0.0%Minnesota 950 $ 1,190 $ 25.3% 6.3% -0.1%U. S.Average 844 $ 992 $ 17.5% 4.4% 3.5%* Based on FCS Reported 1999 Land Sales
1