LANDOWNER RESOURCES_Farm Mortgage Rate Watch

As Fed Begins Raising Interest Rates, Path to Higher Farm Mortgage Rates Less Clear

Amid signs of a strengthening economy, the Federal Reserve followed through in December with its widely expected move to raise the benchmark federal-funds rate—an overnight interbank lending rate—from 0.25% to 0.50%.

Eight years of near-zero interest rates have encouraged individual and institutional investors to pour cash into farmland and other assets in search of higher returns. Since April 2011, New York retirement fund manager TIAA-CREF has raised $5 billion to buy cropland primarily located in the U.S. Brazil and Australia. A parade of mostly private investment funds along with three publicly-traded U.S. focused farmland REITs have followed TIAA-CREF's lead.

Now, with crop farming profits waning, a strengthening U.S. dollar making farm exports less competitive, and borrowing costs expected to climb, shifting fundamentals may pressure farmland values.

Going forward, market watchers will look for insights into the timing and pace of Fed increases next year. Goldman Sachs sees the central bank lifting rates by four quarter-point increases in 2017. As the Fed raises rates, the yield on the 10-year Treasury note (a benchmark for mortgage rates) will rise to 2.9% by the end of next year, according to Goldman analysts. Economists polled by the widely followed Livingston Survey raised their December 2016 forecast for 10-year Treasury bonds to 2.3% at year-end 2016, from their previous estimate of 2.25%. The forecasters look for the 10-year rate to rise to 2.50% by June 2017, to 2.75% by December 2017, and to 3.35% in December 2018.

Borrowing costs on both fixed and variable rate farm real estate loans ticked up in the third quarter of 2016. Banks charged an average 4.63% on variable-rate farm mortgage loans in the July through September period, ranging from a low of 3.51% among Farm Credit banks in the Heartland, to 5.36% across the Dallas Fed region. Fixed rates averaged 5.21%, and ranged from 5.07% in the Midwest to 5.79% in the Dallas Fed district.

In one example of recent large-scale mortgage financing, on November 7, Gladstone Land Corp. (LAND), a publicly traded strawberry-oriented farmland Real Estate Investment Trust, secured a $2.3 million, 25-year mortgage from Farm Credit of Central Florida with the interest rate fixed for the first six years at 3.86%. Thereafter, the mortgage rate will equal the one-month London Interbank Offered Rate rate, plus 2.875%. Those rates are up from May, when Gladstone Land borrowed $2.64 million in an interest-only loan from Farm Credit of Central Florida, which was priced at an initial 2.9% for three years, after which the 15-year loan adjusts to the one-month LIBOR plus 3%. Gladstone has borrowed $9.7 million from Farm Credit of Central Florida since the start of 2015. The Federal Agricultural Mortgage Corporation, also known as Farmer Mac, loaned Gladstone $10.2 million in January via a five-year, interest-only bond issuance in which Gladstone will pay a 3.25% fixed rate. The REIT is also paying an initial 3.5% fixed interest rate on a $100-million, 15-year note from Metropolitan Life Insurance Co. for working capital and to fund additional land purchases. The note's interest rate is tied to 3-Year U.S. Treasury obligations plus a spread determined by MetLife. The rate is subject to adjustment on each disbursement and in January 2017, and every three years thereafter. The also note includes a 0.20% fee on undrawn amounts.

Farmland Partners Inc. (FPI), a publicly traded row-crop farmland fund, borrowed $41.7 million from Farmer Mac in June via a five-year, interest-only bond with a fixed interest rate of 3.2%, and $8.1 million, via an 11-month, amortizing loan with an interest rate of one-month Libor plus 1.8% (which equals 2.57%).

The Fed's low rate policy continues to support the farm real estate values. Low borrowing costs expand both the number of qualified potential buyers of farmland and the price they can afford to pay for land. Falling mortgage rates have also helped landowners with existing debt to lower their costs through refinancing.

Fixed2Q16.2

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.

Variable2Q16b

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.

Spread2Q16

Midwest farm borrowers have historicaly enjoyed lower mortgage rate costs over Western U.S. borrowers. 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 modestly to 63 basis points in June after having widened for five straight quarters.  (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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