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2007 farmland values headed toward plateau

Land values began to plateau, financial markets became more risky, credit was tighter, most commodity prices rose — but expenses rose faster, and fears of recession crept in.

Those were among economic conditions during 2007 that shaped the profile of California agriculture, according to analysts at the spring outlook conference of the California Chapter of the American Society of Farm Managers and Rural Appraisers (ASFMRA).

Chapter members Mark Clarke of Arroyo Grande and Mike Iliff of Fresno gave their accounts at the event held in Bakersfield, summarizing details gathered for the chapter’s annual comprehensive report of trends in agricultural land and lease values.

Clarke, senior vice president of Rabo AgriFinance Inc., noted that farmland values for California, if not the nation, ascended during the period from 2004 through 2006.

“However,” he said, “in 2007 it looked like we were beginning to see land values plateau, although we don’t see any particular weakness in any agricultural market throughout the state.”

He went on to say the fundamentals of most crops remain sound and without oversupply expenses went up, especially energy and feed costs for dairies, at a faster rate than most prices.

“Prices for most commodities, with the exception of cotton, are doing exceptionally well, and in many respects, these are the best of times for agriculture. Clearly, net income on a national scale was at an all-time high.”

But Clarke also tempered that rosy view with reference to an expanding bubble that must eventually burst. Some concern persisted that the downturn in residential real estate would move into commercial and agricultural real estate. He pointed to a slowdown during 2007 of sales of commercial properties, but he added that a reversal had not appeared for farmland.

Other changes, however, were evident. The number of 1031 exchanges fell sharply in 2007 and continued to fall as 2008 began. These transactions under Section 1031 of the U.S. Internal Revenue Code allow sellers to invest proceeds in a like-kind property and defer capital gains taxes. They led to substantial increases in land prices in recent years.

Clarke recalled in early 2007 that economic conditions then resembled Goldilock’s porridge, or “not too hot and not too cold.”

“And two years ago, nobody was saying much about risk, but today risk is everywhere,” he said, adding that a year earlier he cautioned that the term risk was being used again in financial markets and investors should be prepared for volatility.

In a good-news, bad-news review, Clarke said the good news is that interest rates remained low, value of the dollar made exports attractive, rainfall had been normal by March 1 this year, and farm properties continued to trade.

The bad news is that credit is harder to obtain and spreads are wider for all types of borrowing as liquidity declines. Assets for commercial real estate were falling, prompting worries that agriculture might be next. The value of the dollar was having an impact on oil prices and rising costs, and water is limited on the West Side of the San Joaquin Valley. The number of good properties on the market is also limited.

Although the wine industry has moved to more balanced production with most new vineyard plantings having contracts and grape prices stable to increasing, Clarke warned that “unbridled optimism,” coupled with new acreage without contracts, could invite another boom-and-bust cycle to the industry.

Among examples of top vineyard values on the North Coast, Napa County vineyards on resistant rootstock moved well above $250,000 per acre, although the rate of increase was not as steep as that of 2004-2006. Despite the rising property values, prices for Cabernet Sauvignon and Chardonnay grapes remained at about the same levels as 2002.

In Lake County, vineyards on resistant roots remained at about $35,000 per acre, where they were in 2005.

Along the central and south coast, Clarke said, produce growers, and most strawberry growers, were generally profitable in 2007, providing a good foundation for lease rates.

The region also saw high interest in new plantings of blueberries, raspberries and blackberries, while vineyard prices leveled off after a hike in 2006.

To the south, dairies in Riverside and San Bernardino counties, open irrigated land in the Coachella Valley and Imperial Valley, and avocados in San Diego County all remained at values of 2005.

Iliff, with Fresno-Madera Farm Credit, reported generally strong commodity prices for California’s intermountain counties, the Sacramento Valley, and the San Joaquin Valley.

“Land values have softened or flattened out, but are still healthy. Environmental concerns are still with us and now we’ve developed ‘water-woes,’ in the southern part of the region, and labor availability is always an issue,” he said.

Citing the record almond crop of 1.3 billion pounds in 2007, Iliff credited the industry for its marketing success. “Seventy-five percent of the crop is exported, and the industry continues a tremendous job in getting the crop sold and offshore.”

While values of almond orchards in the northern counties rose from $12,000 per acre to $15,000 in 2007, those in other counties tended to rise only slightly or remain constant. Better orchards are being retained by owners.

Iliff took note that the 2008 almond season began with the same ideal conditions that produced the record 2007 crop and opened conjecture that another record might be set.

Turning to wine grapes and raisins, he said the “extreme value” wines at $2 per bottle “have done their job” in removing the wine surplus and encouraging consumer interest in higher-priced wines.

New plantings have stabilized, and more importantly, he added, “wineries are back in the market looking for fruit and concerned about losing acreage. They are offering prices that are motivating growers to stay in production and not convert to other crops.”

New prices negotiated by the Raisin Bargaining Association for 2008-2010 will likely improve both raisin prices and Thompson Seedless vineyard values in the next few years, Iliff said.

Values for open land remained flat for northern counties and Fresno County, but land for row and field crops in Tulare County made a significant jump, from about $8,000 per acre to $12,000 per acre, due to needs of dairies for additional land for waste water management.

Other value gains in 2007 included open land in Kings County, up from about $10,000 to $12,000 per acre, and crop land in Kern County, up from $8,000 to $9,000 per acre.

Copies of the 84-page, full-color 2008 issue of “Trends in Agricultural Land and Lease Values” at $15 each, plus shipping and handling, are available by calling 209-368-3672 or e-mailing [email protected].

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