Low interest rates may insulate farmland values from falling rents

Continuing stress on the US farm sector is likely to push down rents and farmland values, but low interest rates mean an absolute collapse in values is unlikely.

Despite falling incomes and mounting debt in the US farm sector, low interest rates make an insolvency crisis like the one in the mid-1980s unlikely, according to a report from the Federal Reserve Bank of Kansas City (FRBKC).

The bank describes the weakening of the US farming sector as “gradual” and “persistent” in recent years, with negative trends intensifying since late 2015. As a result, growers will be looking to support margins by cutting input costs and asking for lower rents, according to agri researcher Dermot Hayes.

But low benchmark interest rates in the US may insulate farmland values from the effects of lower cash rents, according to the report. Using historic correlations between cash rents, interest rates and farmland values, the FRBKC researchers estimate that a fall in cash rents matching the record 25 percent two-year drop seen in the 1980s would only bring farmland values in the Corn Belt to 18 percent below their recent peak in 2015. The drop would be significant, but the sector-wide debt to asset ratio would remain far below that seen in the 1980s, when a farmland bust sparked a wave of farmland foreclosures and agri bank failures.

Farmers in the FRBKC’s region, which includes major corn-producing states Nebraska, Kansas and parts of Missouri — ended 2015 with their eleventh consecutive quarter of falling net farm incomes. The FRBKC attributes this decline to a combination of steadily falling crop prices and input costs that have remained stubbornly high.

The extended slide in net incomes has fuelled loan demand and decreased agri lenders’ expectations for loan repayment. Despite rising demand and perceived risk of agri loans, interest rates have remained historically low, according to the report.