Archive for June, 2010

Pension Funds Increasing Their Farmland Holdings

Wednesday, June 30th, 2010

A recent Reuters article posted on forexpros.com backs up a growing trend that we have been seeing the last few years here in the Midwest.  That is, pension funds becoming more active in purchasing farmland.  The article (Pension Funds To Bulk Up Farmland Investments) takes a closer look at why pension funds are taking a harder look at farmland as an alternative to their traditional holdings.  With the volatility that the stock market has seen in the last few years, investors are viewing farmland as a sound investment to diversify their portfolio with steady long-term growth and a hedge against future inflation.  The author also mentions that, unlike in the past, many pension funds are purchasing farmland parcels on their own and not part of groups and that the fund managers are staying much more active in the management of the farmland.

One of the biggest challenges for these types of buyers is satisfying all of their requirements.  It is rare to find large amounts of available contiguous farmland, or even available farmland in the same local region.  Even if a property is identified that would work from a dollars/acreage standpoint, it still must fit the fund’s return requirements.

What have you seen in your area with large institutional land buyers?  Have they made any purchases in the last few years?  Is this a trend that you see continuing into the future as companies continue to look for ways to diversify their holdings?

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The Appeal and Challenges of Irrigated Farmland

Thursday, June 24th, 2010

Recently, I’ve had the opportunity to work with several investors who were looking at purchasing an irrigated farm in the Midwest.  The attraction was multi-faceted… A.  The tax benefits of depreciating the equipment; B. Lower real estate taxes stemming from the less productive soils; C. Increased rents and yields; D. The opportunity to grow specialty crops; and E. The abundance of cheap available water.  In addition to these benefits, irrigated land has also been appreciating at a rate that matches, if not exceeds, dryland tracts as reported here… Federal Reserve Bank of Minneapolis newsletter. 

These benefits are appealing to many farmers and investors, even though most areas of the Midwest have productive soils and enough rainfall to produce good crops without any added water.  All that said, in other parts of the country, “water wars” are breaking out.  In the western plain states, there’s a fight brewing between landowners in Nebraska and landowners in Kansas over the amount of water that can be pumped.  A recent article in the Omaha World Herald (Work Continues on Water Compliance) outlines the problems that landowners face when too much water is taken for irrigation use, thus deplenishing the aquifer that the units source.  And worse yet is the tug-of-war in California where agriculture must fight the urban demand for water on a daily basis both in the courtroom and in the field (Water Managers Weigh Implications of Order).

So will irrigation become more popular throughout the Corn Belt?  I think it can but farmers and investors need to learn from their western cousins and be prepared for the fresh water fights that may be on the horizon, especially near large cities (think Chicago) where clean water is becoming more scarce.  And don’t be surprised when governmental authorities from the local county health department to the Environmental Protection Agency or the Army Corp of Engineers try to take control of this resource.  In many parts of the world, water is a more precious commodity than oil. Fortunately, this hasn’t been the norm in the Midwest and with wise use and foresight, it hopefully never will be.

Proposed Tax Changes In Washington

Wednesday, June 16th, 2010

A recent article in Bloomberg Businessweek (Blackstone, Venture Firms Protest Tax Break For Family Farmers) brings to a light a possible bill in Congress to increase taxes on executives of investment firms.  According to the author, some individuals would see their taxes increased by over 150 percent.

The main complaint by the investment firms, such as Blackstone Group LP and Fortress, is that the bill would increase their taxes while exempting family-owned farms.  The proposed “clarification” to the proposed bill also raises another question according to Real Estate Roundtable’s Jeff DeBoer, “It should raise a very serious question: What is the difference between a family farm and a family real estate business?”.

Where should the line be drawn between family-owned farms and farms owned by investment firms?  Do you agree that members of family farms should receive an exemption to the proposed tax increase, while investment firm members do not?  We would love to hear your feedback.

More Facts on Organic Agriculture

Tuesday, June 8th, 2010

In previous articles and blogs, we have discussed the growth of the organic food market.  In certain parts of the country, this segment of agriculture has expanded rapidly.  A recent article in Amber Waves, Organic Farmers Faces Issues and Opportunities, provides more details of the size and scope of this industry. 

As can be expected, organic farming varies significantly across the different types of crops.  For example, nearly 9% of all U.S. berries are produced organically, while only 0.2% of all corn is.  Interestingly, the demand for certain organic products is so great that we’re now importing some of these goods to meet the needs.  This is in addition to the imports of organic crops not typically grown here like tea, cocoa, and coffee.

Unfortunately, the organic industry still faces many challenges.  One of the biggest at the present is the public confusion from other food labels such as “locally grown”.  The two methods should complement, not compete, with each other.  The locally grown label simply tells people where the product is grown, not how as in the case of organic farming.

I believe that the continued demand for organic products and the price premiums they command will ultimately lead to a price premium for land that has met the certification criteria.  The market has been so small in the past that at the present almost no one (including most appraisers) knows what that premium to a non-certified farm might be.  That said, I’m convinced that within 5 – 10 years there will be enough sale data to prove what we inherently know – a specialized asset will ultimately command a premium price in the market place.

A Look at Future Expectations For Agriculture

Wednesday, June 2nd, 2010

Chicago-based Rabobank recently released the Spring 2010 edition of their U.S. Farm & Ranch Survey, where they interviewed farmers and ranchers across the country to gauge their current confidence in their respective fields, and where they see the ag industry headed.  For the most part, the results were encouraging.  Those operators surveyed in the Midwest/North Central region (which includes states such as Illinois, Indiana, Iowa, Wisconsin, Ohio, etc.) saw the lowest input costs of any region, and anticipate to continue to have the lowest input costs through the next year.  With respect to the farmland market, 20%  the surveyed parties in the Midwest/North Central region said that they will actively pursue land purchases in the coming year.  Across the country, this percentage increased by an impressive 250% from Rabobank’s Fall 2009 survey.  Those who have plans to sell farmland in the coming year also increased since last fall, albeit a smaller increase than those looking to buy.

Whether the predictions from those producers surveyed will prove to be accurate will remain to be seen.  However, the overall confidence from farmers and ranchers to continue to be involved in the farmland market should hopefully prove to be a positive.

What are your thoughts on the Rabobank survey and their results?  Where do you see input costs, machinery acquisitions and farmland purchases headed in the next year in your area?  We would love to hear your feedback!