Archive for February, 2012

Status Of The Recreational Land Market

Friday, February 24th, 2012

Historically, if land could not be tilled it was viewed as waste or junk ground.  Sure, a landowner may hunt on in his wooded acreage if he had time, but for most landowners, non-tillable acreage carried next to no value.  About 10 years ago we saw that viewpoint change and the market for recreational land skyrocketed.  Before long, hunting became the popular weekend activity and everyone was headed out to buy a camo outfit and a 12 gauge.  In the beginning of this hunting craze, many non-landowner hunters were able to find plentiful hunting spots, with landowners happy to get whatever they could for acreage that they ad always considered useless.  However, once the demand for recreational land begin to grow, landowners realized that their once useless waste ground had become very valuable.  In some areas of the Midwest it got to the point where wooded acreage was selling for more money than tillable acreage.

In 2006/2007, we began to see some cracks in the recreational market. As with all goods, it comes down to supply and demand.  The market became flooded, and while there was still a strong demand for acreage, the market reached a saturation point and began to soften.  Then, once the economic problems hit in the summer of 2008, the demand for recreational land fell off a cliff…and prices went along for the ride.  During the peak of the market, whether it was the doctor/lawyer coming out of the city or the group of blue-collar buddies getting together to buy a tract of land, most of the money being invested was disposable income.  Once people began worrying more about keeping their jobs and paying their mortgages, buying a tract of land that returned very little income seemed a bit extravagant.

That bring us to today.  So, where are we?  The answer is not exactly clear, but many would say – somewhere in the middle.  From the clients that we work with, we have definitely started to see a bit of a bounce back in the right direction from buyers looking for recreational land.  The market is nowhere near where it was in 2002 – 2007, but it is not as bad as it was in 2008 – 2010 either.  If you have a tract of land that would best be suited for hunting, know that there are buyers out there.  It is just a matter of understanding that it is still a buyer’s market and they can be selective in choosing their purchase, so sellers will need to exercise some patience.  It is also important to understand what a realistic range of values is and be smart about what price you offer the property at.  If it is too high, a buyer will just move onto the next available farm.

Tags: , ,
Posted in Uncategorized | Comments Off

Land Rents Continue to Move Higher

Wednesday, February 15th, 2012

It’s well known that land prices have moved substantially higher the past several years.  Whether the sale was private (between landlord and tenant), or public (auction), the details of the transaction are recorded at the local courthouse so the final sales price is readily available to anyone. Information on the amount of rent being paid by farmers, on the other hand, is generally more difficult to obtain.  Yes, you hear about an occasional cash rent auction (usually conducted by public entities like airports, universities, etc.), but what recently occurred in Iowa takes the idea of bidding to lease land to a new level.

The story begins with Charles Lakin, a large landowner in north-central Iowa.  To ensure that he was receiving fair market rent for the 3,300 acres he owns, he decided to take bids on his land at a series of four different auctions.   As could be expected, interest in the 24 tracts was quite high and at one site there were over 350 people in attendance. The final bids ranged from $325 to $530 per acre per year with a two year lease term. An article written by Jeff Caldwell on the Agricultural.com web site (Land Rent Auctions Stunning) provides more details on the background and outcome of the sales.

I think the entire process will open the eyes of both farmers and landlords – not necessarily for the amount being paid as much as for the open and public method that was used.  There are many leases throughout the Midwest that have not been adjusted to reflect higher commodity prices, and I can’t necessarily blame the farmer if the landlord refuses to follow what’s happening in the marketplace.  The results from a well publicized cash rent auction, however, will certainly provide landlords a mean of discovering what farmers are willing to pay for land.

It will be interesting to see if the cash rent auction concept becomes more popular in the future.  For landlords, it’s definitely a way to guarantee that they are receiving top dollar for their land.  And for farmers… there will be more risk.  Yet, for many, bidding higher cash rent is the quickest means for increasing the size of their farm business – the primary goal for many operators today.

Tags: , , , ,
Posted in Uncategorized | Comments Off

How Can Corn Yields Affect Farm Values?

Friday, February 10th, 2012

I recently attended the Chicago Farmer’s Farmland Investment Fair in Joliet, IL.  It is an event that I look forward to every year because it gives me a chance to visit with other professionals in my line of work and to chat about what they are seeing in the areas they work in.  Throughout the day, many small-group sessions are offered that cover a wide range of topics, from wind and solar energy and eminent domain issues to land values and lease issues.  I sat in on a very interesting land vales session hosted by Ed Wiesbrook & Todd Sclock of 1st Farm Credit Services.  For the most part, they confirmed what most people already know…that farmland prices have risen a great deal recently.  1st FCS has numerous benchmark farms around the state they they appraise every year so they can keep tabs on where the farmland market is throughout the state and look at year to year (and longer) trends. According to their research, their Class A benchmark farms have more than doubled in value since 1999 and their Class B farms have more than tripled in value in the same time period.  In many of their benchmark farms across all classes they saw a 20 – 30% jump in prices since late 2010.

As I said, not a huge surprise.  If you have followed agriculture at all the last 12+ months, I am sure you have read about at least one record-breaking land sale in your area.  If not, you probably will soon.  However, the intriguing part of Ed and Todd’s presentation to me was where they discussed where they see the market headed.  I was pleased to see that they shared many of the same thoughts that we shared in our recent Land Facts market update.  What we spoke about in the market update, and what was also talked about by Ed and Todd, is that the main item to keep an eye on in 2012 will be the crop yields.  The farmland market has been fueled by multiple factors, but none bigger than commodities prices.  It makes sense that the more money that farmers make from their crop, the more aggressive they can be in bidding for more acres and the higher the land prices rise.  However, if we were to see a bumper crop and there is an overproduction of corn (and/or soybeans), the prices for those crops will drop due to basic supply and demand.  That will eventually affect the land market because there will be less dollars available to farmers to spend on farms.  Right now there are still a lot of buyers sitting on a lot of cash waiting for a farm to become available in their area.  And from what Ed & Todd spoke of, Farm Credit typically requires a 40% down payment (either in cash or existing equity) and many buyers are putting down more than that.  For that reason, I think the short-term prospects for the land market remains strong.  As far as long-term, I think we will need to see how the crop yields develop before speculating more.

Tags: , , , ,
Posted in Uncategorized | Comments Off

Underlying Facts Supporting Farmland Prices

Thursday, February 2nd, 2012

I recently attended the annual Land Investment Expo in Des Moines, Iowa and listened to an interesting presentation by Jim Knuth, Senior Vice President of Farm Credit Services.   Because it has so many local lending offices, Farm Credit has the ability to collect and analyze an incredible amount of land sale data.  The discussion included some general information, e.g., land values in IA have increased 34% the past 12 months, along with some more obscure (though important) statistics, some of which may explain how we’ve arrived at these current price levels. To wit…

1. In 2006, there were 6207 real estate sales in the territory serviced by the Farm Credit Services of America district (IA, SD, WY, NE).  In 2011, the number dropped to 4434 sales, confirming that there is a lot less land available to buy.

2.  In 2009, the debt to asset ratio for district borrowers was 35%.  In 2011, the ratio actually dropped to 34% despite higher land prices.  In addition, the loan to collateral value over the same period dropped from 54% to 48%. This confirms that the balance sheets for farmers continue to improve.

3.  In 2008, farmers purchased 82% of the IA farms that closed.  This number dropped to 73% in 2011, thus indicating that investors are continuing to purchase land despite the higher prices.

4.  In 2009, 29% of the land sold at public auction while in 2011 this percentage increased to 50%.  Not coincidentally, most of the record sale prices have occurred at auction, as there are a number of aggressive buyers in the market looking to add to their land holdings.

I look at the underlying land issues listed above, and am more convinced that this rapid increase in farmland values has been driven by profits and not speculation.  At some point, prices will stabilize and there may be a period where the market experiences a short-term correction.  I just can’t buy into the “bubble is ready to burst at anytime” scenario that a few economists are still predicting.

Tags: , , , ,
Posted in Uncategorized | Comments Off