LANDOWNER RESOURCES_Farm Mortgage Rate Watch

Era of Ultra Cheap Farm Mortgages Appears to be Ending

Borrowing costs on both fixed and variable rate farm real estate loans continued to tick up in the first quarter of 2018.

The average rate for a long term fixed-rate mortgage rose to 5.7% in the first quarter from 5.6% at the end of 2017, according to data released by regional federal reserve banks. Regionally, fixed rates ranged from a high of 6.1% in the Dallas fed district to a low of 5.1% in the Chicago region.

Banks charged an average 5.3% on variable-rate farm mortgage loans in the January through March period, ranging from a high of 5.8% in the Dallas region to a low of 4.6% among Farm Credit banks in the Heartland.

Going forward, market watchers will look for insights into the timing and pace of Fed increases this year. Goldman Sachs sees the central bank continuing to lift rates 25 basis points once each quarter until 2019. As the Fed raises rates, the yield on the 10-year Treasury note (a benchmark for mortgage rates) was expected to rise to 3.5% by the end of 2019, according to a Goldman report at the start of this year. However, the 10-year Treasury hit 3.11% May 17th for the first time since July 2011. The "break-even rate"—a market-based measure of expectations for annual inflation over the next 10 years—reached its highest levels in April and May since 2014.

Fixed Variable Treas1Q18 1

Source: Farmland Investor Letter analysis of Federal Reserve data; Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [GS10], retrieved from FRED, Federal Reserve Bank of St. Louis.

A confluence of factors are conspiring to push up Treasury yields. The Trump Administration and Republican controlled Congress' recent tax cut package and a surge in government spending have boosted short-term growth expectations fueled by increased borrowing, which puts upward pressure on Treasury yields. At the same time Washington is ramping up borrowing, the Federal Reserve is raising short-term interest rates and paring $30 billion to $50 billion a month in bond holdings accumulated as part of its stimulus program during the financial crisis. In addition, anticipation of a pickup in inflation pushes up bond yields since it erodes the purchasing power of bonds' fixed payments.

Now, with crop farming profits waning and borrowing costs expected to climb, shifting fundamentals may pressure farmland values. So far, interest rates remain sufficiently low that they don't appear to pose an imminent threat to the farmland market.

The Fed's shift from a long period of encouraging low rates to a more normal interest rate environment will remove an important factor that has helped stablize farm real estate values amid the downcycle in crop prices. Rising borrowing costs reduce both the number of qualified potential buyers of farmland and the price they can afford to pay for land. In addition, higher rates signal returns on alternative investments to farmland are rising, making farmland less attractive.

 Fixed1Q18

Source: Farmland Investor Letter analysis of Federal Reserve data. St. Louis region includes southern Ill., southern Ind., western Ky., western Tenn., northern Miss., Ark., and eastern Mo. Data collection for St. Louis region commenced 2Q12. NA= Not available

Variable1Q18

Source: Farmland Investor Letter analysis of Federal Reserve and AgriBank data. *Heartland region includes Ark., Ill., Ind., Iowa, Ky., Mich., Minn., Mo., Neb., N.D., Ohio, S.D., Tenn., Wis., and Wyo. Because the Federal Reserve Bank of Chicago doesn't collect variable rate data on farmland loans, we use the quarterly average variable rate charged by AgriBank-funded Farm Credit Services associations as a proxy for the region. St. Louis region includes southern Ill., southern Ind., western Ky., western Tenn., northern Miss., Ark., and eastern Mo. Figures in italic represent data from fewer than 10 lenders and may be less indicative of regional trends. Data collection for St. Louis region commenced 2Q12.

Spread1Q18

Midwest farm real estate borrowers have historicaly enjoyed lower mortgage interest costs over borrowers in the western U.S. The spread for fixed-rate mortgages between the Chicago and San Francisco Fed Districts has averaged 76 basis points since the first quarter of 2003. The lower interest rate advantage for Midwest borrowers narrowed to a more normal range in the first quarter of 2018 after nearly doubling to 101 basis points in December.  (1 basis point = 1/100th of a percentage point.)

Current Farm Mortgage Rates

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  • Agricultural Finance Databook (Federal Reserve Bank of Kansas City)
  • Interest Rate Trends for Ag Mortgage Rates - AgStar Financial Services (Minn. Wis.)
  • Farm Real Estate Loan Rates - Badgerland Financial (southern half of Wis.)
  • Agricultural Real Estate Rates - Greenstone Farm Credit Services (Mich.)

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Interest Rate Forecasts

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  • CME Group FedWatch

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Economic Forecasts

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  • Livingston Survey of Economists' Expectations (Federal Reserve Bank of Philadelphia)
  • Survey of Professional Forecasters (Federal Reserve Bank of Philadelphia)

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