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.

As the article mentions, however, in some cases, passing it down to family members may not be the only option.  The scenario mentioned in the article relates to farms that have capital improvements that were at least partially funded by the tenant.  The tenant has more than likely been farming the ground for some time and both parties have built up a certain level of trust for each other.  If an option-to-purchase is included in the rental agreement, it can benefit both sides under the right conditions.  It gives the tenant peace of mind that they can continue to invest in the property (whether it be irrigation pivots, drainage tile, fertilizer, etc.) knowing that they will have the right to stay on the farm, should they want it.  For landlords, they can be comfortable knowing who the property will be going to.  The main risk from the standpoint of the landowner (and/or their heris) is, how do you know if the price the tenant pays is truly the market value?  You can have an appraisal done, but ultimately that is the opinion of one person on one day.  When you are involved in the kind of active market we have seen the last 12 months, with farms appreciating in value by up to 30%, an owner may be leaving money on the table.  For some people, knowing that the ground is going to stay with someone they know overrides the chance money will be left on the table.

Ultimately, when dealing in succession plans, it is recommended that you sot down with you attorney to make sure that what you want to happen is actually in writing.  While a simple farm rental lease can be done without the aid of an attorney (Read the Loranda blog post from last week for more information on leases), once you start adding in items such as options-to-purchase that can affect the long-term outlook of the farm, it is probably best to sit down with your attorney to make sure nothing is being overlooked.

The North Central Farm Management Extension Committee is a team of 12 economists and attorneys who are well versed in the nuances of Midwestern farming.  They have developed a website, Ag Lease 101, where both landlords and tenants can gather information on lease trends.  Sample leases can also be downloaded and used as necessary.  Even with all the materials available on the site, there are times when having an attorney review a lease, or hiring a farm manager to set the cash rent amount, can be a prudent business practice. Keep in mind that higher commodity prices have considerably raised both the risks and returns to farming. And a million dollar farm, encumbered with bad lease terms, can cost an owner a lot of money.

I think this is a main reason why in many areas across the Midwest a growing number of tenants and landlords are moving back towards a more traditional shared lease, so that both the farmer and the landowner can share in the benefits (and risks) of the variability in farmland production.  It seems like this is most prevalent when the landowner had a connection to the farm operation while growing up and understands that the tenant is taking all the risk with a cash rent payment.  The other avenue, and one of the current buzz words in agriculture, is the flex lease.  Essentially and hybrid of cash rent and shared leases, it provides the landwoner with a base guaranteed return, with a chance to share in profits after the harvest is completed.

It’s important for landowners and tenants to have an open and ongoing dialogue regarding the rent.  It also benefits landowners to do their homework about rent prices (and practices) in their area to make sure they are receiving a price that is line with the market.

One of the biggest surprises in the survey was the positive outlook of livestock producers, the result of lower grain prices coupled with higher livestock prices. For years, the livestock sector was battered while the grain farmers prospered and it appears that that trend has finally changed.

The attitude of grain farmers is a little more cautious, especially compared with a year ago. The underlying concern remains the cost of inputs for 2012. Current crop prices are also worrisome, but there’s still plenty of time to sell 2012 grain. The cost of producing the crop, on the other hand, has escalated and will soon be locked in at much higher levels. Fortunately, lower interest rates and stronger balance sheets are helping to mitigate the cost issue somewhat.

As has been discussed here on numerous occasions, land prices often follow farmers’ expectations for future profitability. Though not as confident as only 12 months ago (after all, farmers are pessimistic by nature), I do not foresee their interest in land abating any in the near future.