AgLetter

AgLetter Insights: Crop Yields Fairly Strong Despite Drought Conditions

As the third quarter of 2023 came to a close, the Midwest’s harvest was starting to come in—and stronger than expected, given the drought conditions earlier in the year. That good news from the field was tempered somewhat in the November 2023 issue of the Chicago Fed’s AgLetter, which also documented slowing growth in overall agricultural land values in the Bank’s Seventh Federal Reserve District. In this Q&A, David Oppedahl, AgLetter author and policy advisor at the Chicago Fed, talks about timely rains, whether the ag sector might be softening, and the Chicago Fed’s upcoming Midwest Agriculture Conference.

Q: So what is happening to farmland valuation? It seems like it’s losing its momentum as we look at the results from the third quarter of 2023.

A: That’s a fair assessment of the situation: We’re still seeing increases from a year ago, but generally they’re smaller than they’ve been in the past couple of years. So it’s kind of slowing down, but not yet retreating.

Q: Yet Indiana farmland is still growing markedly in value, with a 16% year-over-year growth rate. How do you account for the continued strength there?

A: Well, there are a couple of factors that come into play in Indiana. One is that its farmland values started rising later than those of some other District states, such as Iowa’s in particular. And then farmers have had a very good year in Indiana. It was the least affected by the drought, I think, of the states in the District, which also includes most of Illinois, Wisconsin, and Michigan.

We also are hearing reports about a large development project in the area northwest of Indianapolis, and that is leading to farmland being sold at multiples of what it would be for agriculture. And then those landowners are going and buying other Indiana farmland and bidding up that.

Q: That’s a really interesting dynamic. I think you hinted already at the answer to this next question, but what accounts for the stagnant values seen in Iowa?

A: Right, so the reverse in some ways is the case there, that Iowa had an earlier move up in farmland values. It was very strong initially. And so it’s tailed off a bit from that. And then in conjunction with that, the last couple of years, Iowa’s been hit the hardest by the drought in the District. And even though it did relatively better this year than the previous year, it still was not up to what would have been expected in a normal year.

Q: Earlier this year, you talked about a trend toward rented farmland and questions about foreign ownership potentially becoming issues in the Seventh District. Is there any news on either of those fronts?

A: Well, the news is that at our annual Midwest Agriculture Conference on the 28th of November, we’re going to have sessions that look at those kinds of issues. Foreign ownership is certainly still a topic that’s on the radar, with Congress looking at maybe some new legislation. And there’s attention being focused in areas like energy and agricultural land—building solar fields and wind farms and things like that. There is a lot that we’re going to share at the conference on these kinds of emerging topics.

Q: Yes, would you please tell us more about the conference?

A: The title of the conference is Who Owns Midwest Farmland? And Why? And it’s going to explore the various dynamics related to farmers, investors, and people inheriting land and trying to understand why they may or may not sell that land. So, for instance, the conference ends with a panel including professionals in farm real estate and some of the largest investors in farmland such as TIAA’s Nuveen—and then also a farmer, someone who’s on the ground, talking about whether to expand and where to expand based on the kind of footprint that he needs to have a successful operation. Obviously, the biggest players by far are the farmers themselves.

Q: How do people register? And do they have to come to Chicago?

A: You can register on our website as a virtual attendee, which is at no cost, or to come to Chicago—and there’s a small fee to cover the meal expenses.

Q: OK, so the drought. There were drought conditions earlier this year. Yet crop yields, you report in the latest AgLetter, are turning out to be OK—better than OK. How did that happen?

A: In the end the drought wasn’t as intense as it was, say, in 2012, when you could look at the chart of yields and see a big drop-off. And there were timely rains. The drought kind of spread in June. And then in July there were some good rains in areas—not everywhere, but enough that for the overall District, they managed to bring up the yields. And then in August, there was some dryness again.

So the drought, I would say, isn’t even over for our District. But we got through most of it without having a major downturn in output because of the timely rains, in addition to the farming technology and the seeds being much better now.

Q: So yields overall ended up being fairly strong. But what did you learn about profits on this year’s harvest?

A: The net farm income expectations are down from a year ago and from two years ago as well. So this year, when you look at the revenues that are expected based on the kind of price picture we have right now and what the output will be, they’re down around 20% when you combine corn and soybeans for the District. That’s a rather significant drop.

Q: Interest rates across the American economy remain high. What has that done to credit conditions in Midwest agriculture?

A: Overall credit conditions aren’t in too bad of shape, but they are softening, it seems. And we’re starting to see that some of the more positive trends of recent years are fading. We’re going to have probably a much more challenging scenario moving forward, particularly because of the higher interest rates, but also with the lower income expectations.

Q: Taken together, many of these factors seem to suggest an overall softening in the ag sector. Is that too pessimistic a reading?

A: I mean, it’s not pessimistic in that we’re getting softer from some of the best years ever. It’s still fairly good times in the sense that it’s coming off such strong years. Relative to the period before the pandemic, we’re still in better shape in terms of our agricultural credit conditions. And farmland values are much higher now. So that gives a little bit stronger base for farm operations.

For the latest data and insights, read the third quarter issue of AgLetter.

The current and previous editions of AgLetter Insights will become available as posts in Midwest Economy.

Data on credit conditions at Seventh District agricultural banks and on farmland values in the Seventh District are available for download as spreadsheets. Recent data for credit conditions are also available on the third page of the AgLetter.

Seventh District Credit Conditions
Seventh District Land Values