LANDOWNER RESOURCES_Farm Mortgage Rate Watch

Rate Increases Pause as Fed Lowers Growth Outlook

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

The average rate for a long term fixed-rate mortgage rose to 6.1% at the close of December, up 50 basis points from 5.6% for the same period a year ago, according to regional federal reserve banks. Regionally, fixed rates ranged from a high of 6.6% in the Dallas fed district to a low of 5.6% in the Chicago region.

Banks charged an average 6.0% on variable-rate farm mortgage loans at year-end 2018, an 80 basis-point increase from 5.2% a year ago. Regional variable rates ranged from a high of 6.3% in the Dallas region to a low of 5.7% in the Minneapolis fed district. No data was available from Farm Credit banks lending across the Heartland.

Going forward, market watchers will look for insights into the timing and pace of Fed increases this year. Most Fed officials expect the central bank will need at least two more 0.25% increases this year. As the Fed raises short-term 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 Sachs report at the start of this year.

Outlook for Rate Increases Weakens

Looking ahead, concerns have grown that trade tensions between the U.S. and China and the tariff battle are slowing global growth. On February 14, San Francisco Fed chief Mary Daly said that there is a good chance the U.S. central bank won't raise interest rates in 2019. "If the economy evolves as I expect it to—2% growth, 1.9% inflation...then I think the case for a rate increase isn't there" this year, Ms. Daly told The Wall Street Journal.

The Philadelphia Fed's widely followed Livingston Survey, which summarizes forecasts of 39 economists from industry, government, banking and academia, lowered its forecast for the interest rate on 10-year Treasury bonds to rise to 3.42% at the end of June 2019, down from the previous estimate of 3.5%. The forecasters also predicted that 10-year bonds will edge up to 3.51% at the end of December 2019, and reach 3.55% at the end of December 2020. Government bond yields fell June 15th after the Trump administration said it would impose tariffs on $50 billion of imports from China, and Bejing officials said they would retaliate immediately, raising the potential for a trade war between the world's two biggest economies.

10YrTreasury4Q18

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 have been conspiring to push up Treasury yields, until the tariff fight between the U.S. and China intensified last June. 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 has been raising short-term interest rates and paring about $40 billion a month in bond holdings accumulated as part of its stimulus program during the financial crisis. In February, the Fed said it may end the wind-down of its $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than previously anticipated.  

Now, with crop farming profits waning and borrowing costs expected to climb, shifting fundamentals may weigh on farmland values. So far, interest rates remain sufficiently low that they don't appear to pose an imminent threat to the farmland market. However, China is set to impose an additional 25% tariff on July 6 of agricultural products including soy, corn, wheat, cotton, rice, sorghum, beef, pork, poultry, fish, dairy products, nuts and vegetables. This could weaken the outlook for farm profits. 

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.

 Fixed4Q18

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

Variable4Q18

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.

Spread4Q18

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 75 basis points since the first quarter of 2003. The lower interest rate advantage for Midwest borrowers eased two basis points to 72 in the fourth quarter of 2018.  (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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