Archive for December, 2011

A Review of the 2011 Farmland Market

Friday, December 30th, 2011

I’ve been trying to come up with a single word to describe the land market the past 12 months and the only thing that I’ve come up with is… WOW!  Most of the experts had predicted that values would be stronger this past year (primarily due to projected higher commodity prices), but I don’t think anyone anticipated the magnitude of what we experienced.  And it wasn’t just isolated areas that jumped – most states across the Midwest saw farms appreciate 25 – 33%, and that didn’t include the annual operating income for the year!

Iowa State University recently released the results of their 2011 farmland survey (Farmland Value Reaches Historic Statewide Average) and it does a good job of summarizing of what really took place all across the Corn Belt.  As has been discussed numerous times, the increase in net farm income has been the biggest factor driving land prices higher (for perspective, the average corn price in IA in 2005 was $1.94 per bushel, while the average price in November 2011 was approximately $6.05 per bushel).   When you combine a relatively limited supply of land on the market with a substantial amount of cash available to fuel demand, the results should really not be that surprising.

So what can we expect in 2012?  I am quite confident that we will not see the same percentage increases that we’ve had the past 12 months.  That said, I do think that prices will remain strong for the first half of the year as a carryover from 2011, but it’s the second half of next year that concerns me somewhat.  Grain prices will continue to be the catalyst, but a recent quote I read by economist Jason Henderson – “I have never met a farmer who is unwilling to produce himself [or herself] out of prosperity” – was somewhat of a reality check for me.  Or better stated, one really good crop year could be the brake that stops the seemingly runaway land locomotive. However, if land buyers will remember that farmland is a long-term investment, and plan for both increases and decreases in value over time, then land should remain a good asset to own.

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Runaway Land Prices Rational?

Tuesday, December 13th, 2011

As mentioned in a previous blog, last month the Chicago Federal Reserve Bank hosted a farm real estate conference.  This gathering was the culmination and presentation of a year’s worth of research by the FDIC, the Chicago Fed, the Farm Credit Administration, and various other regulators.  These agencies wanted to determine if the steep run-up in land prices really was a bubble ready to pop, as some have suggested, or simply the result of market forces at work. Their findings were neatly summarized in this article by Marcia Zarley Taylor, Runaway Land Prices Rational, Regulators Now Say, originally published on the DTN website, and then republished on the KFGO radio website – www.kfgo.com.

In a nutshell, the experts confirmed what many of us have been saying for quite some time – current land values are not a function of speculators manipulating the market in hopes of making a quick profit, or buyers taking on excessive risk by heavily leveraging their purchases (a.k.a. the U.S. housing market).  Instead, values have been driven to their lofty heights by a combination of record net farm income and record low interest rates.  Yes, profits and cash flow have been the catalysts for higher land prices… a stark contrast from the market 30 years ago.

Since the fall of 2006, when the demand for land really began to pick up, one group I think that has been under-appreciated, yet a true stabilizing force in the market, is the ag bankers.  They have kept a close eye on the farm financial situation and provided the necessary capital for farmers/investors to complete land purchases, but only when these borrowers had enough of a down payment so that the risk was minimized.  Hopefully, they’ll continue to keep their lending standards high in the future and act as the brake to slow any reckless behavior.  Now, can you tell me more about that 78 acres that sold in NW Iowa last week for $20,000 per acre?

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Projected 2012 Farm Returns Adjusted Down

Friday, December 2nd, 2011

In September, The University of Illinois released their annual estimates for crop expenses and returns for the following crop year.  Since that time, we have seen the corn and bean markets pump the brakes and slow down.  So, in response to the ever-changing commodities markets, the U of I has recently readjusted their projections (Reductions in Projected 2012 Crop Returns…) to account for less potential revenue in 2012.  In September, the U of I based their 2012 farm income projections off of selling corn at $6/bushel and soybeans at $13/bushel.  The updated numbers have decreased the projected corn and bean prices to $5/bu. and $11/bu., respectively.  The result is an approximately ~29% decrease in potential income per acre Central IL.

It will be important to keep a watchful eye on how this affects the 2012 farmland market.  With less profit, farmers will have less money to invest into farmland.  However, this does not necessarily correlate to a decrease in the demand in the farmland market, at least in the short-term (9 – 12 months).  Farmers on average will still have a profitable 2012.  Also, many farmers experienced a very profitable 2011 and are sitting on cash to invest into farmland.  From what we have seen recently (both at our own auctions and observing others), farmer-buyers are not bowing out of the farmland market anytime soon.  $10,000/A  is still the new threshold for Class A Central IL farmland, with some sales pushing north of $11,000/A.  As long as corn and beans remain at level to keep farmers profitable, interest rates stay low, and the availability of farmland remains relatively tight, the aggressiveness of buyers should remain.

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