The California Farmland Market

April 13th, 2014

In our last two posts, we’ve provided insight into land value trends in Iowa and Illinois. Since corn and soybeans are the most dominant crops being grown in the Midwest, typically land values in the two states will move in concert with each other as both are equally affected when grain prices move up or down.

This week we’re going to look at a recent land value study from California. The report (Trends in Agricultural Land and Lease Values), compiled by the California Chapter of the American Society of Farm Managers and Rural Appraisers, looks at both row crop acreage and permanent plantings. The “Golden State” leads the U.S. in terms of agriculture sales each year (for perspective – Iowa is second and Illinois is seventh) and grows over 400 different crops. This crop mix is the direct result of a diverse climate and a wide variety of soil types.

After reading the report, you quickly learn that the most important issue currently in the far west is the availability of water. Unlike the Midwest, where we rely almost entirely on rainfall for our crops, California agriculture depends heavily on irrigation. That doesn’t seem like a problem until you realize that the demand for water far exceeds the supply. This creates a scenario where agricultural interests have to compete against metropolitan areas for water. And different crops have to compete against each other to determine which has the greatest economic return relative to the amount of water used.

With the world’s population continuing to grow at a rapid pace, I personally believe that there will be three constraints to producing an adequate supply of food in the future: 1. the amount of land available for crop production; 2. the rate at which new technology can increase the output for each acre being farmed; and, 3. access to reliable sources of water. Farmers in California are on the front lines of this war for water. And even though it might seem like an irrelevant concern to those farming in the Midwest today, I think it’s an issue that will become quite important at some point in the future. Sooner versus later water will replace oil as the world’s liquid gold.  And to think, most of the growing areas across the Corn Belt get this resource for free.

Iowa Farmland Prices Dip Slightly

April 4th, 2014

A few weeks ago we blogged about the annual look back at Illinois land values from the Illinois Farmland Values Conference.  Our neighbor to the west, Iowa, just released a similar look back at what they have experienced the last 6 months.  An article recently published in the Des Moines Register (Iowa Cropland Prices Slide, But Less Than Expected) does a good job of summarizing the key data that was released by the Iowa Realtors Land Institute.  Overall, since October 1 high-quality Iowa farmland has decreased in price by 4.9%, which represents the first time prices have lowered since 2009.  The reasons for this slight dip are similar to the reasons why Illinois farmland prices have slipped – mainly commodity prices.  We have seen corn and bean prices come down considerably since the summer of 2013 and that has taken some of the wind out of the sails of the farmland market in Iowa and other corn belt states.  The good news is that so far the decline in farmland values have not been as drastic as the drop in commodity prices.  A recent uptick in prices for both corn and beans have encouraged farmers that things have stabilized somewhat.

So what is the outlook for Iowa farmland in the coming year?  Similar to our thoughts on Illinois, all indications are that we are looking at a plateau and maybe some continued softening in 2014.  There will more than likely still be the occasional record-breaking auction that will make some news, but there will also be some more “no-sales” that will start to occur as sellers try to figure out what the market value for their farm is worth.  Overall, however, if commodity prices hover around their current levels, we expect Iowa farmland prices to do the same.

IL Farmland Values Conference

March 21st, 2014

Earlier this week I attended the IL Farmland Values Conference conducted by the IL Society of Professional Farm Managers and Rural Appraisers.  I look forward to the conference every year because it is a great way to take a look back at the year that was and also take a look at what may be headed our way in the coming year.  We got to hear from multiple knowledgeable ag economists from schools such as Purdue, Iowa St., and the University of Illinois.  For the most part, the speakers agreed that the upward trend that we have seen in farmland the last few years is headed for a plateau.  There were no forecasts for drastic declines in values and the dreaded “bubble burst” was dismissed, but the overall tone was definitely, “things are going to slow down”.

I think the overall sentiment in the room is that in the coming years we are going to start seeing a lot more sporadic sale prices as micro-markets get even more defined.  There may be a no-sale and a record breaking price in the same county in the same week.  Whether a farm brings an acceptable price may come down to the interest and financial strength of the adjoining landowners…that’s how small some of these markets may become.  Last fall we began noticing at auctions that farms that had a few blemishes (waterways, ditches, odd-shaped, etc.) started to soften and that has continued to carry over to this spring.  Conversely, for the prime, Class A farms that are easy to farm, they very well may continue to appreciate in value because that is what both the investor and farmer buyers will covet the most.  I think we may see a widening of the gap between those types of farms and everything else.

As far as some of the numbers and trends from yesterday – Across Illinois in 2013 the average price for Excellent productivity farmland decreased by 2%.  Good farmland decreased in value by 3% and Average farmland decreased by 4%.  In terms of who bought land in Illinois – 64% were local farmers, 14% were local investors, and 9% were outside investors.  52% of sellers were estates, 14% of sellers were individual investors, and 11% were retiring farmers.  The most common reason (50%) given for selling was to settle an estate.  The second highest (22%) was to take advantage of current prices.  Nearly half (43%) of all IL sales came at public auction.

Looking forward, of those surveyed nearly 90% believed that farmland values would stay between -5% and +5% of current values over the next 5 years.  While there will always be unknown variables (drastic weather events, unforeseen demand shifts, government policy changes, etc.) the outlook for farmland values looks to be a bit softer in some areas in the coming years, but the majority of predictions do not see any drastic decreases in value.  Keep in mind that the run-up in values in the last 4-5 years has been a historic one, and that pace could not be maintained forever, so a correction was due at some point.  And even if some areas do see values soften some, a seller is going to still be able to take advantage of the majority of that appreciation we have experienced and sell for a much higher price then they would have 5+ years ago.

I think 2 key things will make the difference between a successful sale or an unsuccessful one: 1) The brokerage/auction company informing their clients of the current market in the specific area surrounding their farmland and what the current price trend is in that immediate area so the seller will know what to expect, and 2) A brokerage/auction firm that knows how to market the farm properly and reach every potential buyer and bring them to the table.  With decreased demand, having one potential bidder not show up to an auction may be the difference between a successful sale and a no-sale.

Farmland and the Capital Gains Tax

March 17th, 2014

In the past, we’ve discussed the turnover rate of farmland and how today it is about one-half of what it was 10 – 20 years ago (which may actually be good, since it is likely helping to support land values during this period of lower commodity prices). Many of the land experts believe that this land scarcity can be attributed to the low returns on alternative investments – when someone inherits a farm nowadays, they simply hold on to it versus selling out and taking their cash elsewhere. I think, however, that there may be another issue affecting the number of farm transactions that should be explored in more detail – the capital gains tax rate.

I’ve followed the farmland market for well over three decades and when I think back about the sellers from years ago, I remember that the retiring farmer was a major part of this group. Once age or health dictated that the farmer quit, he sold his property and moved to town. Land prices didn’t appreciate much back then, so any taxes due on the capital gains were minimal. When the farmer passed away, his beneficiaries simply received cash, because the farm had been sold earlier.

The scenario today is much different – land prices have appreciated significantly and now if this same farmer sells out and moves to town there’s potentially a rather large tax consequence to consider. Marcia Zarley Taylor recently discussed this issue in an article on the dtnprogressivefarmer.com website > (Why Seniors Keep a Grip on Land). As she astutely points out, in some states the capital gains tax rate can be as high as 35%. If the thought of writing a check to the government for nearly a third of your farm’s sale proceeds isn’t a motivation for holding on to the farm, then I don’t know what is! The result – these retiring farmers are retaining their properties and the next generation is now inheriting the land and not the cash like they would have 25 years ago.

Some might argue that having beneficiaries jointly inherit a farm is a good thing – it increases the likelihood of keeping the farm in the family. While that may be true in some situations, I’ve also seen families ripped apart because the siblings can’t agree on what to do next – sell, hold, or just argue. Regardless, of your opinion on this issue, I always find it interesting to see how various government policies can affect human behavior. And in this specific case, the existing tax rules may actually be helping to support land prices. Why? – the high capital gains tax rate is causing more beneficiaries to directly inherit farm properties (versus receiving the cash as in the past), and upon inheritance low-interest rate policies are encouraging them to keep the farm off the market. I would be remiss in not mentioning that the estate tax exemption in also an important component in this equation. If it stays high, then it makes even more sense for the farmer to hold on to his land. At some point, I’m sure our government officials will re-visit their policies and try to change them in order to increase tax revenues. In the meantime, let’s just enjoy what we have since nearly all farm owners are benefiting from the underlying price support that the limited supply of land is creating.

A Worst Case Scenario for Land Values

February 27th, 2014

I consider myself lucky… everyday I have the opportunity to talk with many farmland stakeholders – from farmers to absentee landowners; ag economists to agri-businessmen; and from lenders to the media. This often allows me to know what is happening (or is going to happen) in the marketplace before anyone else. Lately, I have detected even more pessimism regarding the direction that land prices may be heading. This reaction can be expected from anyone who follows grain prices – farmers just won’t have enough net income to pay for a major capital purchase like land.

Having accepted the idea that land values may move lower, the follow-up concern for many buyers (and especially sellers) now appears to be – “How much lower can prices go?” A recent article on agweb.com (Land Values Could Decline by 30% or More) discusses this issue using an internal study of AgriBank, one of the largest banks in the Farm Credit System. In their analysis, based upon the current outlook for commodity prices and interest rates, the lender estimated that land values could plummet as much as 30 – 34% across parts of the Cornbelt. The AgriBank land model leans heavily on the change in net farm income, and in their worst case scenario a 50% decrease in net income will lead to a 33% decline in farm land values. While a decline of this magnitude is possible, they don’t necessarily see it happening all at once – in their projections it may take 4 years to materialize. Despite all the doom and gloom, the Bank does try to keep things in perspective… a 33% decrease in land prices would still be less than the price appreciation that most states have seen the past two years.

In my opinion, the people who should be the most nervous about this issue are those who are considering a sale in the next 12 – 18 months. The risk for these sellers could be high if they reject a good offer now (even if it is less than what someone would have paid a year ago) and then the market continues to trend lower for the next several years. In this situation, it may be important to remember a paraphrased version of an old saying… “a good offer in the hand today may be worth more than any hoped for offers in the future.”