THE LORANDA GROUP, INC

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?

On November 15th, the Federal Reserve Bank of Chicago hosted a conference entitled “Rising Farmland Values – Causes and Cautions”.  A series of prominent economists, professors, lenders, and other industry professionals were invited to offer their view of the current state of the farmland marketplace in the Midwest.  Many of the  presentations can be found and downloaded here (Chicago Fed Ag Conference) by clicking on the “Agenda” tab.

I’m the first to admit that there are several different methods for discussing and analyzing the land value issue. Some experts have taken reams of historical data and neatly summarized the whole story in a series of charts and graphs.  Others have taken the more simplified approach of simply talking with land buyers and land sellers to see what’s been motivating their behavior.  When looking at the issue from this angle, it appears the biggest driver in ag land values has been the increase in farm income.  No doubt there are other forces at play, e.g., the risk/return of alternative investments, etc., but it still boils down to the fact that farmers have been making more money and they’ve invested a large part of their profits into new land purchases (or higher rents, thus stabilizing the returns to investors).

The future direction of land values is uncertain (though I personally feel that the rapid increase we’ve seen the past 5 years is going to level off) and I encourage all farmers and investors to continue reading and studying the issue closely.  But when you get to the point when your head is ready to explode from information overload, just remember the basics – if farmers are making money, land values will remain steady and/or move higher.  When they aren’t, especially for an extended period of time, then it’s time to get worried.