Archive for March, 2011

Land Values Continue To Rise

Friday, March 25th, 2011

We recently had the opportunity to attend the Illinois Land Values Conference in Bloomington where participants discussed the last 12 months of trends in farmland values and leases.  Needless to say, with some of the sales that have been occurring lately, there was plenty to talk about!  According to the research, good-quality Central Illinois farmland increased 22% since last year’s report.  Keep in mind that that doesn’t include some of the more recent sales data that we have seen over the last 4-6 weeks.  In some areas, there have been reports of sales being 25 – 35% higher than a year ago.  In Southern Illinois, prices of good-quality farmland have risen by as much as 33% and in Northern Illinois as much as 18%.

What is driving the market right now?  The conclusions reached at the Land Values Conference are similar to what we have seen: 1) Farmers will be able to sell their grain at a high price this fall and are penciling in strong profits.  In our experience, farmers typically reinvest their profits back into their operation (i.e., buy more farm ground), as opposed to stocks, bonds, etc.  2) Interest rates remain relatively low and financing is readily available to farmland buyers who need it.  3) Investors, both individual and larger institutional buyers, view farmland as a stable investment that they can use to diversify their portfolios and receive a steady annual income off of.

So what is farmland worth in today’s market?  It is a bit of a moving target, but the simple answer is, “More than it was a year ago”.  In a recent DTN-Progressive Farmer article (Land Prices Soar in Seller’s Market), 1st Farm Credit Services appraiser Charles Knudson is quoted as saying he is appraising farmland at 4% monthly gains at the moment in his area.  It is important to remember that the overall farmland market is still very much a group of localized smaller markets.  A farm that sells for $10,000 per acre may only be a few miles from a farm that sells for $8,000 per acre…and both farms may have been sold for their maximum value.  While location is one of the biggest factors in determining the value of a piece of property, it is not the only one.  Do your homework on recent sales and see how they stack up to yours in terms of soil quality, drainage, fertility, access, eye-appeal, etc.

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Nationalistic Concerns and the Importance of Food

Thursday, March 17th, 2011

The world’s population is expected to reach 9 billion people by 2050.  That’s a lot of people to feed and some countries, possibly fearing future unrest, are beginning to take a strong look at who they want (or don’t want) to own their most precious resource.  A recent article by Shanghai Barbie Farewell (Brazil Sets Up New Roadblocks for Agricultural Investments – Especially From China) that was posted on the Knowledge @ Wharton Today web site discusses the steps that Brazil is taking to ensure control of their land in the future.

Restricting the ownership of agricultural property is not a new concept.  Some countries outright ban it; some place restrictions on the number of acres that can be owned; and others simply require registering and reporting foreign ownership on an annual basis.  That said, for years many countries encouraged outside investment capital and know how in order to develop their farming industry.  They realized that owning millions of acres did not necessarily mean a vibrant agricultural economy… infrastructure needed to be built; modern seed, fertilizer, chemicals, and irrigation that could adapted to local growing conditions were necessary; and the most important requirement – the knowledge/education to make the entire system work.

Nationalistic politics (“we don’t want others owning our sacred ground”) and ensuring future food supplies (“we don’t want others producing food on our land and shipping it elsewhere”) are probably two of the biggest drivers in this trend. Plus, there’s a fairness issue.  Many countries still need capital and expertise to continue their agricultural growth but they want to structure their arrangement as a partnership and not give up total control (similar to what the oil industry is now utilizing).

I personally believe this trend in outside ownership restrictions will continue to expand. Some distinctions will likely be made between the investments made by foreign citizens and those made by foreign governments.  Regardless, politicians know that they can’t let their citizens go hungry for fear of de-stabilization.   And that’s one thing they want to avoid at all costs.

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Land Prices Continue To Surge

Thursday, March 10th, 2011

People who are involved in some manner with agriculture already know what the farmland market has done the last 6 months.  Record-setting sales have been occurring all across the Midwest.  Prices from $10,000 – $13,000 per acre are beginning to become common for quality farmland.  Farmland sales are starting to make national news now as well.  In a recent article in the New York Times (In Price of Farmland, Echoes of Another Boom), the author takes a look at some recent sales in Iowa and the factors behind them.  Similar to what we have said here before, the market is being driven by high commodities prices and favorable interest rates.  While the purchaser in the article used all financed money to purchase their farm, many buyers are still bringing a lot of cash to the closing table.  One important point the article makes, and one to keep an eye on as we move forward, is how farmland owners treat their current land holdings.  If they begin using their current land as collateral (values at current prices) to borrow more land, and the market stalls, then things could quickly turn for those people.

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Despite Higher Input Costs, Farming Still Looks Profitable in 2011

Wednesday, March 2nd, 2011

With land prices, land rents, and other input costs now sharply higher than a year ago, many experts are wondering if farmers can still make money in 2011.  If you believe a recent article by Purdue University economists (Crop Returns Growing As Production Costs Rise), then the answer is yes.  Great news for farmers and landowners alike! 

As with most forecasts, some assumptions have to be made: 

           The weather has to cooperate so that the crop yields  meet or exceed the 5 year average. Some will argue that reduced yields will increase grain prices, thus offsetting the lower production. This is true if the weather problems are widespread.   An isolated drought, however, presents the scenario where there are fewer bushels to sell at the same or lesser price.  Not a good situation to be in, which is why in this high risk – high reward environment farmers are scrutinizing and utilizing the crop insurance products that can best protect their investment.

            Grain prices need to stay at, near, or above current levels.  I’ve talked to numerous farmers this winter who have been pre-selling more grain than normal – partially to lock in good prices, but mostly as a hedge to protect their profits (andthe higher rents) in 2011.  The people who pre-sold little grain in 2010 crop look pretty smart today.  And there are those who are still grumbling that pre-selling what they thought was 50% of the 2010 crop actually was closer to 75% due to lower than expected yields.  Unfortunately, because of the increase in production costs this year, the stakes are higher and simply waiting until harvest is over to price grain may be the best way to lock in a loss. 

Farmers talk about increased costs but the absentee landowner often doesn’t know what true expenses might be.  To assist in understanding the numbers, Purdue also releases a publication that estimates both income and expenditures for the year (2011 Crop Cost and Return Guide).  Keep in mind that they are using average numbers, which may not be 100% accurate for any given farm. Other land grant universities also publish similar cost guides that may better reflect the differences between geographic regions. 

In summary, if the predictions hold true, then there should be a lot of happy people at the end of 2011 – farmers, landowners, farm suppliers, and lenders.  And don’t overlook the money that is ultimately spent in the local communities by these people.  Remember – it’s not just the farmers who benefit when agriculture is making money.

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