October 1, 2011
Times are very good in Farm Country. Despite weather-delayed plantings and floods in the Corn Belt and Northern Plains and continuing droughts in the Southern Plains, strong demand and continuing tight supplies of most farm commodities have set the stage for record farm profits in 2011 and 2012.
Farm income is forecast to surpass $103 billion this year – 31% above last year and the highest inflation-adjusted level since 1974. This surge comes on top of last year’s 27% income gain.
Optimism over rising profits helped fuel a 9.4% increase in U.S. cropland values through the start of this year – the biggest jump in four years. USDA pegged the average value of cropland at $3,030/acre as of Jan. 1 – a $260 increase over 2010.
In Iowa, the country’s top corn-producing state, cropland values spiked 24%, to an average $5,700/acre. In August, a 153-acre farm in northwest Iowa’s O’Brien County fetched $14,350/acre at auction. The land was located in a “hot zone” of competitive farmers, says Jon Hoogers, of Vander Werff & Associates, Sanborn, which handled the sale. The buyer: an established farmer with two sons intent on expanding their land base.
Corn & Soybean Digestonline readers are universally bullish on farmland’s near-term prospects. A recent poll (see sidebar) shows Corn Belt farmers look for land prices to inflate 5%, while southern farmers look for a modest 1.5% gain. However, southern farmers expect current land-appreciation trends to extend another two years, double the one-year prediction of Corn Belt readers.
While the Midwest has garnered headlines for record auction prices, cropland in the Northern Plains has delivered the strongest capital gains – up 73% since 2006. It’s here – in the Dakotas, Kansas and Nebraska – that the adoption of advanced seed genetics and conservation tillage have allowed corn and soybean production to expand West. At the same time, good harvests have enabled Plains farmers to ride the wave of rising grain prices. USDA estimates that cropland prices rose 19.5% in North Dakota and 18% in Nebraska in 2010. University of Nebraska pegs the state’s farmland-appreciation rate at an even loftier 22% rate for the 12 months through Feb. 1.
The pace of farmland-price inflation steepened through this year’s first half. Land values rose an average 14.8% for the 12 months through July 1, according to a study by AgriBank FCB, the St. Paul, MN, lender that services Farm Credit associations in 15 states across the country’s mid-section. Iowa farm values spiked 36% from a year ago, according to the AgriBank study.
Other hot spots for buyer demand are western Kentucky and southern Indiana, where land values are up 33.5% and 31.9%, respectively, from July a year ago. Agribank’s survey also showed weakness in Wyoming and southern Missouri, where values fell 2.7% and 2.3% from a year ago.
Cropland’s fat returns aren’t being ignored. Though farmers seeking to expand their land base remain the dominant buyers, pension funds, endowments and other institutions are adding agricultural real estate to their investment portfolios. Dan Whitehurst, president of Southern Agricultural Consultants, Tallassee, FL, estimates that institutions purchased $100 million in cropland in the last year across southwest Georgia and northern Florida.
Based on recent fundraising activity and investment mandates, the Farmland Investor Letter looks for non-farmer purchases of farmland to continue to expand. New York retirement fund manager TIAA-CREF is seeking to attract $1.5 billion for a new fund that will buy farmland in the U.S., Australia and Brazil. TIAA already holds more than $2 billion in farmland investments – about half of that in U.S. farmland. Veteran manager Hancock Agricultural Investment Group, which manages nearly $1.4 billion in farmland, is targeting a $250 million raise for its new Hancock Global Farmland Income Fund.
Farmland has also caught the attention of at least one mutual fund: First Pacific Advisors’ $6.7-billion Crescent Fund recently acquired a $15-million stake in U.S. Farming Realty Trust, a two-year-old farm fund that has raised $261 million.
Is this farmland’s carousel-ride moment when the gold ring sweeps near and passes by, or has the agricultural sector crossed an inflection point of sustained growth? This is the question on landowners’ minds as the prime land-sales season approaches.
Absent production shortfalls caused by bad weather, economists look for grain prices to decline modestly over the next two years while land values trend steady to slightly higher. USDA forecasts that farm real-estate values will inflate 7.1% in 2011.
What's driving cropland value?
Here are four key drivers of cropland values to focus on as the prime land-sales season approaches:
Crop prices: Expectations for continued tight grain stocks have helped boost corn prices from about $3.50/bu. last year, to around $6.85/bu. today. That represents $570/acre in additional revenue on land producing 170 bu./acre corn, and is a primary driver of rising land prices.
Much of the bullish investment thesis for farmland depends on sustained growing demand for grain and animal protein from fast-growing nations like China and India. But that view could be upended: The economies of China and India are slowing. China expert Nicholas Lardy of the Peterson Institute for International Economics say there are questions over how long China can sustain its growth over the medium term.
Even if high grain prices persist, don’t expect crop earnings to leap again in 2012. Seed, fertilizer and other input suppliers have proved adept at raising prices to extract their share of growers’ margins. Farmers are also expected to aggressively bid up cash rents to expand their operations (See Rent sidebar.).
Interest rates: The era of historic low rates was expected to taper off when the Federal Reserve stopped buying Treasuries at the end of June. But the Fed has subsequently pledged to keep interest rates down at least through mid-2013 to help bolster the economy. The interest rate on 10-year Treasury bonds – a benchmark indicator for mortgage rates – recently fell below 2%, a level last seen in April 1950.
In the Fed’s latest bid to revive the sputtering recovery, the agency is considering “twisting” its portfolio of Treasury securities to hold more long-dated government debt. This could further lower mortgage rates and fuel land-price inflation since lower borrowing costs expand both the pool of qualified potential buyers and the price they can afford to pay for land. Longer term, interest rates will inevitably rise. Rising rates will prompt land buyers to demand higher income yields – which translates to lower land values.
Land inventory: Until earlier this year, a lack of attractive alternative investments (one-year CDs are paying 0.85%; taxable money market funds 0.02%) prompted landowners to put off land sales that would normally have occurred as part of estate settlements and farmer retirements.
But record land prices are attracting increased farm listings and auctions. Hertz Farm Management, a Nevada, IA, farm-property manager and brokerage, says its volume of farm sales is running 17% ahead of last year. “For a long time, the reason the market had been so strong is that there was a limited amount of land for sale,’’ says Troy Louwagie, a Hertz broker in Mount Vernon, “but that changed in midsummer.” Mr. Louwagie says he is seeing more land come on the market this fall than at any time in his 15-year career. As the supply of land for sale expands, buyers will have more choices and that could have a negative impact on land values.
In Illinois, market participants so far see only a normal seasonal rise in property offerings. Listings are generally selling within 30 days, provided they are priced at the current market, which is $10,000-11,000/acre in central Illinois, says Dale Aupperle, president of Heartland Ag Group, Ltd., Forsyth, IL.
Farmers Bullish on Future Gains
An exclusive survey of Corn & Soybean Digest online readers also finds Southern farmers more bullish than Midwest farmers on future grain prices and long-term land appreciation rates.
Farmland values reflect expectations for future crop profits. “As long as we have low interest rates and strong commodity prices, we will see upward pressure on land markets,” says Mike Morris, chief appraiser for 1st Farm Credit Services, Normal, IL.
To help get a pulse on just how you view land market price trends and your expectations for 2012 cash rent rates, Corn & Soybean Digest conducted an exclusive online survey of readers.
Online readers in the eastern Corn Belt states of Illinois, Indiana and Ohio say “good” non-irrigated cropland is trading at $6,000/acre; $5,600/acre in the western Corn Belt states of Iowa, Nebraska and Minnesota; and $2,500/acre in the southern states of Arkansas, Mississippi and Texas.
The majority of Midwest online readers say farmland prices have been rising rapidly in recent months, while most Southern respondents characterize the market as rising slowly. Readers say current price trends have been in place for three years in the western Corn Belt and South, and nearly four years in the eastern Corn Belt.
Southern farmers are more bullish on the medium-term price prospects for corn, and have the highest expectations for land price gains over the next decade. Online readers in the South expect corn prices to average $6/bu. over the next five years, versus $5.50/bu. in the eastern Corn Belt, and $5/bu. in the western Corn Belt.
Looking further out, readers expect land values to rise 5% annually over the next decade in the South; 4% in the eastern Corn Belt; 3% in the western Corn Belt.
What will eventually stall the land-value run? A majority of online readers across all regions believe that falling grain prices due to a recession or increased production will eventually cause land prices to stabilize or decline. Readers say the second most likely factor to pressure land prices is rising interest rates.
A majority of readers in the South (55%) and western Corn Belt (51%) agree that buying farmland today involves a great deal of risk, versus 45% in the eastern Corn Belt.
Cash Rents Should Spike in 2012
The gap between cash rents and cropping profits continues to widen, helping support record farm-operator earnings.
Rent income yields (per-acre cash rent divided by the per-acre land value) across Indiana, Illinois and Iowa are at their lowest level in at least 44 years. Income yields for Iowa cropland have shrunk from nearly 6% in 2000 to 3.4% today.
Part of this is due to legacy leases – multiple-year agreements struck before grain prices escalated. Another reason for the growing gap is absentee landowners out of touch with the changing economics of crop production.
A recent paper, published in Choices magazine by University of Illinois economists Gary Schnitkey and Bruce Sherrick, noted that Illinois crop profits doubled to $306/acre between 2006-2010 and 2000-2005, while cash rents rose just 24%.
As a result, landowners’ average share of cropping profits fell to 55% during 2006-2010, compared to 82% during 2000-2005. If corn prices continue to average around $4/bu., the economists look for Illinois cash rents to rise sharply if rents revert to landowners’ historical 82% share of crop profits. Illinois cash rents would average $250/acre under this scenario – 37% above this year’s $183/acre average rate.
The willingness of farmers to push up rents is already playing out in competitive-bid lease offerings. On Sept. 6, a dozen farmers submitted bids to lease 322 acres of cropland for three years in Bond County, IL. The winning $281/acre bid was 55% over the prior $182 rate.
Our survey of Corn & Soybean Digest online readers shows that farmers look for rent rates on excellent-quality land (corn yield above 200 bu./acre) to increase 19% in 2012 to $300/acre; good quality (175-199 bu./acre) land to rise 11% to $250/acre; average quality (150-174 bu./acre) tracts to hold steady at $150/acre; and fair quality (below 150 bu./acre) land rents to climb 13% to $90/acre.
Do your homework
It’s important to note that USDA’s land value and cash-rent surveys offer a snapshot estimate of price levels at a particular moment in time. Surveys can be useful for discerning trends, but every land parcel has unique characteristics, so don’t rely on USDA survey data as a precise benchmark for establishing land prices or rent rates on individual parcels. The sharp rise in grain commodity prices has significantly increased forecast cropping revenue for 2011 and 2012. This is expected to fuel significant increases in cash-rent bids for 2012.
Both landowners and tenants should ask local farm-loan officers what rental rates they’re seeing both on leases in which there is no change in the owner or tenant, and in leases in which there is no legacy relationship.
Editor’s Note: Mike Fritz is the Editor of theFarmland Investor Letter.
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