Posts Tagged ‘farmland’

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2012 Corn: Higher Yields, Lower Prices?

Friday, March 9th, 2012

Although farmland across the Midwest still lies untouched, many are already speculating on 2012 crop production.  A recent article on Ag Professional (Corn Market Could be Vulnerable to Supply Jump) discusses the outlook for 2012 corn yields, the underlying factors for those yield predictions, and how the end yields may affect prices.  To summarize the article, analysts are predicting that the below average yields that we saw in the corn market the last few years will be erased this year and 2012 has the potential to be a very bountiful crop.  With the increased production, it is expected that the price for corn will go down.  That being said, the article speculates that the anticipated average price for corn over the next 2 growing seasons would be $5 per bushel, so not catastrophic.

What does this mean for the farmland real estate market?  As we have discussed at length here before, the strength of the land market is tied very closely to the strength in crop prices.  As prices go up, farmers have more profit to invest in farmland, as well as pay more cash rent to investors who get higher returns.  As crop prices fall, the pie gets a little smaller and there is less money to spend on farmland.  2012 should be an interesting year.  Barring an unforeseen weather event, it is likely we are going to have above average crop yields coming in, which will drive the prices down.  However, the demand for farmland is still strong and I anticipate it to remain so.  There still remains an overall shortage of available properties on the market, which I think will help stabilize the market, even if crop prices trend lower.

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Foreign Ownership of Midwestern Farmland

Friday, March 2nd, 2012

It’s no longer a secret that Midwestern farmland has been one of the best performing assets the past few years – farmers and investors alike have flocked to it for both its annual stream of income and its appreciation in value.  As an offshoot of its widespread popularity, land is now attracting the attention of many foreign investors.  The fact that a non-U.S. person/entity might be interested in a farm in the Corn Belt is nothing new (citizens from outside the country currently own about 1.8% of agricultural land here – with Canadians comprising 40% of this group).  But based upon the number of calls/emails/questions we’ve received the past several months, it appears that the demand for a parcel of Midwest farmland from people living outside this country has increased dramatically.

Unbeknownst to some, it is possible for aliens to buy and own land in the Midwest but there are certain restrictions.  The federal government has regulations, and eight states (IA, MO, WI, NE, OK, SD, MN, ND)  have their own rules that must be closely followed.  The University of Nebraska has recently released a publication that provides an overview of the laws in that state (Nebraska Restrictions on Foreign Land Ownership) that can be easily found and downloaded from their Agricultural Economics web site. Note that some of the statutes in these states can seem slightly arcane… in some instances even a partnership or corporation in IL is considered “foreign” and is limited on how much they can own.

While I personally don’t anticipate foreign buyers having a big impact on land values in the Corn Belt, I do know that there are a lot of them asking questions.  Some of them have been discouraged by the government regulations, and some don’t understand how difficult it is to buy land at the present due to its limited supply (you want to buy 15,000 acres of Class “A” soils in Central IL in the next 12 months?… good luck with that!).  Alien owners also have to factor currency fluctuations into their ownership equation – something a U.S. buyer typically never has to consider.  So even though buying a Corn Belt farm might be a dream for many foreigners, sometimes it’s just not a practical thing to do.

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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.

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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.

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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.

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