Archive for September, 2011

2012 Indiana Rent Prices Headed Up

Thursday, September 22nd, 2011

While grain prices have cooled off recently, the ag industry is still looking to have a very healthy 2011 crop year.  Yields in many areas are much better than anticipated, and when combined with commodity prices that are still sitting at high levels, producers are figuring to come out in good shape this year.  Landlords that are looking to renew and/or renegotiate rent contracts for 2012 are looking to increase their profitability as well.  A recent article on AgWeb.com (2012 Cash Rents to Increase with Production Costs, Incomes) quoted a recent Purdue Extension study that suggests Indiana farmers could see a similar jump in rent prices as they did from last year – around 13 %.

The driving factor continues to be high grain prices.  Worldwide demand for US grains appears to be strong through at least the next 12-18 months, which should keep prices strong.  However, many farmers are going to be hit with higher input costs in 2012, mainly fuel and fertilizer.  As we saw in 2007 and 2008, the margins at $7 corn are sometimes no greater for producers than they are at $3.50 corn.

How will this affect the land market?  At most sales, farmers have been an integral component on driving sales.  While we have seen a strong demand from individual and institutional investors, it is typically the local farmer base that is one one of the biggest groups bidding on the land.  As rents and other input costs go up, their available disposable income will decrease, giving them less cash on hand to attempt to buy farmland.

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Returns To Illinois Farmland Still Shine

Friday, September 16th, 2011

For years, I’ve been extolling the virtues of owning farmland to my clients and others in the investment community.  In many cases, the response has been that of skepticism… “of course you’re promoting farmland, that’s what you sell for a living”.  Recently, though, University of Illinois professor Bruce Sherrick published an article on www.farmdocdaily (Illinois Farmland Investment Performance Revisited) that strengthens my case.  Utilizing information from the USDA Farmland Survey published last month, Dr. Sherrick compared the long-term risks and returns of owning farmland with various other assets. His analysis showed that farmland, relative to other investment alternatives, has A. low systematic risk; B. high relative returns for the risk; and C. provided a good insulation against inflation. These factors would be considered an almost unbeatable trifecta in the world of high finance and investments.

I think it is important to point out that the analysis covered a 40-year time period (1970 – 2010).  This horizon is much longer than what many investors might prefer. But most of us in the industry typically emphasize the fact that land is a long-term investment, not something that you can just jump in and out of with the hopes of making a quick profit.  Realistically, every investment will standout if the right time period is used in the analysis.  But that’s what I like about this study – the data and returns from the worst time period ever for the land market (the 1980s) is included… and farmland still shines.

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Mid-Year Farmland Report

Thursday, September 8th, 2011

The IL Society of Professional Farm Managers and Rural Appraisers recently released their Mid-Year Survey regarding farmland values and rent prices. Some of the key points for farmland values from the results include:

-Land values have increased 14% over the first half of 2011

-Excellent farm prices now are averaging $10,000/A

-Most of those surveyed expect values to continue to increase over the next 12 months

-Most expect corn prices to remain north of $6/bushel for the 2011 crop

Some key points for rents:

-Most expect cash rent on excellent farmland to be above $365 dollars per acre, which is an increase of nearly $40/A over 2011 rents

-Good farmland is expected to increase by around $36 per acre and average farmland by $28 per acre

-While fixed cash rent and share leases still make up the bulk of lease arrangements, most expect variable cash rents to gain popularity in 2012 as landowners look to reap more benefits from higher grain prices.

To read the full report, follow the link.

Overall, the survey confirms what many of us in the farmland real estate industry have been hearing out in the field for awhile now- as long as grain prices stay high and interest rates stay low, we are going to continue to see tremendous strength in the industry, whether it is in the form of a record land sale or an updated rent agreement.

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Cheap Money Keeps Getting Cheaper

Thursday, September 1st, 2011

Commodity prices are often cited as the biggest driver of farmland prices… and deservedly so.  Without $7.00 corn I doubt that we would see $10,000 land.  But let’s not ignore the other big dog in the room, i.e., interest rates.  A recent article by Linda H. Smith on dtnprogressivefarmer.com (Time to Reap Cheap Money) provides a good overview of the interest rate market. For example, in the four Corn Belt states served by Farm Credit Services of Mid-America, 20-year farm mortgages are running under 5%. This is a definite boon for those buying land at current prices, and a real opportunity for existing landowners to refinance their debt at lower rates.

Probably the biggest unknown at this stage is how long these low rates will last.  Some economists, notably Kansas State professor Allen Featherstone, believe that there will be a small uptick at some point – “Based on an analysis of Treasury yields, the market expects somewhat higher interest rates in the future; it expects inflation to rise, but only by about one percentage point”.  Another interesting insight from Featherstone – “When the financial crisis hit in October 2008, five-year Treasury Inflation Protected Securities (TIPS) spiked to four percentage points over inflation. Now, it has collapsed below zero. In other words, traders are paying to hold the money.”

These low rates obviously help borrowers, but they also have drawn investor cash from C.D.s and bonds into the farmland market.  When you combine the current interest rate environment with record grain prices, the argument that farmland values are merely a speculative bubble ready to burst seems a bit absurd. In reality, both farmers and investors are buying land for solid economic reasons, not for speculative purposes.

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