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.


2015 Farmland Returns

May 15th, 2015

Forecasted profits for 2015 continue to look bleak for farmers and they will more than likely see the lowest returns of the last 5 years.  A new article posted by Gary Schnitkey on the University of Illinois’ Farm Doc Daily (Farmland Returns in 2015) analyzes the hard numbers and where the financial outlook may end up, if grain prices stay at expected levels.

As Schnitkey addresses, one of the main deciding factors that will determine whether a farmer is profitable or not in 2015 will be the level of cash rent that they are paying.  When factoring in non-land costs such as fertilizer, seed, chemicals, and equipment there is a very good chance that the farmers that are paying the very high cash rent prices will be losing money on those particular farms.  According to the article, average non-land costs more than doubled from $302 per acre in 2006 to $615 per acre in 2013.  Gross profits were for the most part going up during that same time period, so farmers were able to still take some profits.  However, the input costs have remained at a high level while grain prices have been cut in half from their highs of a few years ago.

The main takeaway for landlords: For those in a cash rent situation, don’t expect tenants to be able to maintain current rent levels in 2016 if both grain prices and input costs remain static.  Even if you are locked into a long-term lease, there is a chance the tenant may need to renegotiate terms to stay afloat financially.  For those under a shared lease agreement, there should still be profits there, just at a reduced rate from previous years.

The Revised Agricultural Conservation Compliance Regulations

May 7th, 2015

As part of the 1985 Farm Bill, the Congress implemented rules for farmers and landowners to follow if they wished to be receive government farm program payments in the future. These regulations focused on areas that were considered the most environmentally fragile – wetlands and highly erodible soils. Not all farmers were happy with these rules because it forced them to change many of their production practices. On many fields with rolling hillsides, they were told to leave crop residue on the surface in order to stop the erosion of the topsoil. This was quite a change for those who had spent decades moldboard plowing field after field.   They could also no longer, without government permission, drain any wet areas on their properties that might make these tillable tracts easier to farm. In theory, the government believed that these rules would help protect the environment (which I think they have for the most part), yet many farmers did not like the idea that “big brother” was telling them how to run their businesses. However, most farmers and landowners did comply because thirty years ago the annual government farm program payment was the only thing keeping them financially afloat.

Over the past three decades, farmers have accepted conservation compliance as part of the guidelines they must follow to stay in business and modern equipment, chemicals, and no-till practices have made life much easier. In the most recent Farm Bill that passed, adherence to protecting the environment was still a priority but Congress realized that many of the compliance rules had to be adapted because farmers would no longer be receiving direct payments from the government. However, since the U.S. taxpayers are subsidizing crop insurance premiums, the USDA mandated that farmers still follow conservation guidelines or they would no longer receive these subsidies. An article on the University of Illinois’ farmdocdaily website (Reviewing USDA’s Revised Conservation Compliance Regulation) provides an excellent overview of the revised rules and why they were made.

Perhaps the most important fact for farmland owners to understand… they, too, will be penalized if their tenant does not comply with the conservation rules. This could not only cost them money, but also their farm may be environmentally damaged. So even though these laws seem antiquated in today’s high-tech agricultural world, they must still be followed… if for no other reason than it’s the right thing to do.

2015 Corn Revenue Expected to Decline For Another Year

May 1st, 2015

For anyone associated with agriculture, it’s probably no surprise that many analysts are predicting another tight year for farmers.  The price for corn has been cut in half from the high prices that were available in 2012/2013 (Close to $8/bushel down to less than $4 currently).  This isn’t a new revelation, farmers dealt with falling prices in 2014 as well.

However, the difference between 2014 and 2015 may be the yields.  Lower prices last year were offset in many parts of Illinois by outstanding yields.  So, while farmers were getting less for their corn, they had more of it.  Many analysts are projecting slightly less bountiful yields this year, which if true, could very well mean less revenue.  The  question will be…what price can those bushels be sold for?  A recent article written by Gary Schnitkey on the University of Illinois FarmDoc website (Projected 2015 Corn Revenue with Comparisons to Revenues from 2010 to 2014) examines the potential for this upcoming crop year.  While the U of I is projecting lower corn yields in 2015, they are also projecting slightly higher prices, which should help limit the reduction in revenue.

If these projections hold true, it could mean a continued softening of the real estate market.  While I don’t see a major correction coming anytime soon, if revenue for farmers continues to dwindle then the downward direction of farm prices (and farm rents) will continue as well.

Mixed Signals in the Midwestern Farmland Market?

April 21st, 2015

To the casual follower of farmland price trends, reading recent articles about land values might seem confusing. One press release from Iowa, discussed the results of a state Realtors Land Institute survey that reflected an 11% price decrease from 2014 (click here for IA report). A similar survey in Illinois showed that values there were only down 1 – 3% during the same time period (click here for IL report). Considering that both states grow predominately corn and soybeans, how can there be such a difference in the direction that values are heading? Are Illinois farmers wealthier? Are they willing to take on more debt than their western counterparts? Were the yields in Illinois better in 2014, or are farmers there less concerned that the current low grain prices will last? I think all these ideas may have some merit, and there may be at least one more reason that has had some impact on the behavior of land buyers the past few months.

Realistically, the most obvious difference between the two states in 2014 was the corn yield – Illinois averaged 200 bushels per acre while Iowa averaged 178. When factoring in the lower price of corn, the extra bushels to sell could have been the difference between a nice profit last year, or perhaps none at all. The 5.5 bushels per acre disparity in soybean yields would have impacted the bottom line as well. In terms of the relative wealth and debt tolerance attitudes between the two groups of farmers, I personally don’t see much of a difference. However, one variance that I have noticed over the years is how much faster those in Iowa will respond to a change in the outlook for farm profitability.

This thought can be illustrated in the table below, which comes from Dr. Bruce Sherrick’s article published on the University of Illinois farmdocdaily website on August 15, 2014. If you click on the table, you will see that for most of the past 50 years, the average land price in Illinois was higher that that of Iowa. However, in 2007 that price gap began to shrink and in 2009 the average price of Iowa land actually overtook Illinois for the first time. I don’t think that it’s just a coincidence that this time period also corresponded with higher grain prices and higher farm profits. At the same time, the outlook for continued farm profitability looked quite promising as well, and average land prices in Iowa raced past those in Illinois.

The net income outlook for the past 18 months, however, has been entirely different (due primarily to lower grain prices), and Iowa land prices during this period have been falling at a much faster rate than in Illinois. Again, I don’t think this is merely a coincidence.

In summary, perhaps the biggest reason Iowa values are trending lower at a faster rate now, is because they trended higher at a faster rate before, due to excessive optimism by the farmers in the Hawkeye state. Over time, these differences should all balance out but in the interim, this trend may likely continue for the next year or two.