Farm Land Value Reports Confusing Buyers & Sellers

August 5th, 2016

The USDA just released their land values summary for 2016 > USDA Land Survey and some of the numbers are a bit surprising, at least relative to other surveys we’ve recently seen, e.g., the Indiana Land Values report published by Purdue University > Indiana Land Value Survey.  Both groups used the June ’15 to June ’16 time period, but the Purdue report suggested that values were down ~ 8.5 % on average while USDA said IN “cropland” prices were steady.  I may be biased (Go Boilers), but I think the Purdue numbers better reflect the marketplace.

If you’re like me, you’re probably wondering how the two results can be so different (note – the Illinois and Iowa USDA numbers were also just as confounding as what was reported in Indiana). The groups do have slightly different methods for collecting the data, but all the survey recipients are assumed to have some knowledge of price trends in their area. I hate to sound cynical, but if the bean-counters in Washington can’t be more accurate with their figures, then they should consider saving the taxpayer’s money and stop publishing their report.

The Hopes and Dreams For Agriculture, Washington Style

August 2nd, 2016

As they do every four years, the political parties have released their platforms on agriculture. And as those of us with an interest in farming and landownership do every four years, we scour these papers to see if there is anything that might impact how we do business. Below is the most recent synopsis on how those in Washington plan on helping us in the future. Feel free to smile, smirk, or grimace as you read along!

Democratic Plank: Investing in Rural America

We will work to build a stronger rural and agricultural economy. Democrats will increase funding to support the next generation of farmers and ranchers, with particular attention given to promoting environmentally sustainable agricultural practices. We will encourage programs to protect and enhance family farms, a cherished way of life for millions of Americans. We will expand local food markets and regional food systems and provide a focused safety net to assist family operations that need support during challenging times. And we will promote clean energy leadership and collaborative stewardship of our natural resources, while expanding opportunities in rural communities across America. While the EPA’s new Agricultural Worker Protection Standard goes a long way to protect farm workers from harmful pesticides and herbicides, we recognize there is a lot more we can do. The Democratic Party supports stronger agricultural worker protections including regulation of work hours, elimination of child labor, ensuring adequate housing for migrant workers, and sanitary facilities in the field.

Democrats will spur investment to power the rural economy. We support strengthening rural water, sewer, and broadband infrastructure to make rural businesses more competitive. We will expand access to equity capital for businesses and expand the New Markets Tax Credit to better serve rural small businesses. We will promote collaborative stewardship of our natural resources, while developing clean fuels that will grow our economy, lower our energy bills, combat climate change, and make America the clean energy superpower of the 21st century. We will provide assistance to producers who conserve and improve natural resources on their farms and double loan guarantees that support the bio-based economy’s dynamic growth.

The Republican Agricultural Platform

Agricultural production and exports are central to the Republican agenda for jobs, growth, expanded trade, and prosperity. Because our farmers and ranchers care for the land, the United States does not depend on foreign imports for sustenance. Americans spend a smaller percentage of their income on food than any other nation. On average, one American farm produces enough food to feed 155 people. No other nation has been as generous with food aid to the needy. We have good reason to celebrate our domestic security in food.

Under a Republican president, America’s trade negotiators will insist that our global trading partners adhere to science-based standards with regard to food and health regulations.

We must also ensure that domestic policies do not compromise our global competitiveness through overregulation and undue interference in the marketplace. There is growing recognition that federal dairy policies, crafted during the Great Depression, are increasingly an impediment to the ability of our dairy producers to meet the expected doubling in global demand coming by 2030.

We oppose the mandatory labeling of genetically modified food, which has proven to be safe, healthy, and a literal life-saver for millions in the developing world.

Farmers and ranchers are among this country’s leading conservationists. Modern farm practices and technologies, supported by programs from the Department of Agriculture, have led to reduced erosion, improved water and air quality, increased wildlife habitat, all the while maintaining improved agricultural yields. This stewardship of the land benefits everyone, and we remain committed to conservation policies based on the preservation, not the restriction, of working lands. For this reason, ranching on public lands must be fostered, developed, and encouraged. This includes providing for an abundant water supply for America’s farmers, ranchers, and their communities.

Farming and ranching remain high-risk endeavors, and they cannot be isolated from market forces. No segment of agriculture can expect treatment so favorable that it seriously disadvantages workers in other trades. Federal programs to assist farmers in managing risk must be as cost-effective as they are functional, offering tools that can improve producers’ ability to operate when times are tough while remaining affordable to the taxpayers.

Republicans are dedicated to leading this country forward, which includes getting things done on time, including the next Farm Bill.

The Democrats play politics with farm security. Much of the Democrats’ delay had nothing to do with the vital role of American agriculture. It concerned their efforts to expand welfare through the Supplemental Nutrition Assistance Program (SNAP), which now comprises more than 70 percent of all farm bill spending. During the last eight years of a Democratic Administration, nearly all the work requirements for able-bodied adults, instituted by our landmark welfare reform of 1996, have been removed. We will restore those provisions and, to correct a mistake made when the Food Stamp program was first created in 1964, separate the administration of SNAP from the Department of Agriculture.

A Bubble in the Farmland Market?

June 25th, 2015

One of the more common questions we have received over the last few years has been, “When is the farmland market bubble going to burst?”.  Potential sellers wanted to know if they needed to sell before losing value and investors wanted to know if they should stay on the sidelines in anticipation of prices drastically falling.  As of now, it appears that there will be no large burst, but the continued leaking of air that we have been experiencing the last few years.

A recent article on Market Watch (Spiking Farmland Prices Offer a Lesson on Market Bubbles) takes a look at the topic of market bubbles and why they may not always be similar.  The article suggests that the farmland market was not in a bubble, but responding to the financial boom in the underlying agricultural economy during the same time period as we say prices dramatically increase.  The argument against the bubble theory is that cash flows increased along with the pace of farm prices, but once cash flows started to decrease, then farm prices followed suit.  In a bubble market, argues Purdue agricultural economist Brent Gloy, farm prices would have continued to rise as cash flows decreased.

Another telltale sign is to look at who was actually buying land and paying the highest prices.  In our experience, it was farmers and local landowners that were paying most of the “high water mark” prices, not investors.  The local farmer who has been driving by a tract of ground his entire life is typically going to bid more for a piece of farmland than an outside of investor because the farmer has the emotional attachment to that tract that the investor simply doesn’t have.  According to the article, during a bubble, investors would have been bidding right along with farmers up to the record-breaking sales, regardless of the underlying return.  In most sales, this was not the case.  Investor bidders would come to an auction knowing what rent they could receive on the farm and knowing what they needed their net return to be and they backed into a price they would stop bidding at.

So what does that mean for the market moving forward?  The article insinuates that caution still needs to be taken and the possibility of a larger correction is still a possibility.  Two items to keep an eye on are 1) Interest rates – If we start seeing rates creep up then buyers will scale back what they are willing to spend.  2) If commodity prices continue to fall, some over-leveraged farmers may need to sell off some farmland to cover expenses.  If a glut of farms come on the market at the same time, it may dilute the pool enough to cause a more rapid decline in prices.  Although at this time it appears that while the market may continue to soften in certain areas, the risk of a drastic across-the-board drop is unlikely in the near term.

Do Government Programs Affect Farm Prices?

May 29th, 2015

We often discuss the variables that play a role in farm prices, particularly grain prices and interest rates.  However, there are many other factors that help shape the market as well and one of those is government programs.  A recent article published on the University of Illinois Farm Doc Daily website highlights the impact of direct payments (The Influence of Direct Payments on US Cropland Values).  As the article discusses, the direct payment program was not directly tied to the current price for grain, but was based on historical base acres.  This program gave producers a floor to help with budgeting and cash flows.  In the 2014 Farm Bill the direct payment program was eliminated in favor of an insurance-based system to help manage risk.  It remains to be seen how this may affect the income to farmers, and as a result, how land prices will be affected.  According to the article, a recent study showed that for every dollar in direct payments, land prices increased by $18 per acre.

Farmland Values Remain Steady… For Now

May 22nd, 2015

The Federal Reserve Bank of Chicago just released their 2015 First Quarter Agricultural Newsletter, and their survey of agricultural bankers during this time period showed little change in the average price of good farmland across the six state region. Surprisingly, especially considering the current prices of corn and soybeans, over half of these lenders believed that land values would remain fairly steady throughout the second quarter of this year as well. The report noted that demand for farmland has been weakening the past several months, but it appears that the available supply is shrinking even more. This in turn has provided the necessary support to keep prices stable.

In my opinion, this quarter’s publication, which you can download by clicking here > Chicago Fed Ag Letter, contains a lot of additional information that may portend how land values will react later this year. On page 2, there is a graph that reflects the trend in cash rental rates. Across the district, rents decreased by 8% for 2015, which is the biggest annual average drop since 1987. This decline will likely impact what investors are willing to pay for land as they often have a benchmark rate of return that they must achieve before buying. On page 4, you will find a table of selected agricultural economic indicators that show the changes in commodity prices over the past two years, along with other data. This information may be the best reflector of how farmers’ income will be impacted in 2015. Finally, and probably the most positive news in the report, can be found in the credit conditions table on page 3. Yes, there has been mild deterioration in many of the ratios, but overall interest rates remain low and agricultural banks continue to be strong financially. Many lenders have become more proactive in their borrowing polices and they appear to slowing down the expansion plans for any of their high-risk borrowers.

All-in-all, I think this edition of the ag letter provides a good overview of what I’ve been seeing and hearing in the countryside. Grain prices remain a major concern for all, but many farmers are beginning to prepare now for the potentially volatile times ahead.