Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 06/05/14

A 20% to 25% Land Crash? Really?

Marcia, in your June Businesslink column in "The Progressive Farmer" magazine, you quote a Farm Credit Administration economist saying, "We’re expecting a land value correction of 20% to 25%" over the next few years. What can make this happen? The price of the crop does not have the bearing as in the past. The price of land here has not stopped going up. --Cal

Cal, I can’t speak for the Farm Credit Administration’s rationale, but in general most economists say what buyers pay for land is based on future income prospects. In the long-run, that means land values mirror farm income and/or the potential rents landowners think they can charge. (Interest rates also affect affordability of land, but not as much as farm profits).

The problem is most of the “official” 10-year estimates of commodity prices from USDA and the University of Missouri’s FAPRI, for example, have corn averaging about $4 over the next decade, not the $6 to $7 cash corn growers averaged in 2012, so I think FCA is assuming future farm incomes won’t be as robust the next 5-10 years as they were in the last decade. There’s always a lag though, as in the 1980s when farm incomes fell first but the price of land didn’t bottom for five or six years.

Recent Federal Reserve surveys found a kind of mixed bag in land value trends, so some parts of the country are showing stable or slightly increasing values. However, in the bellwether central Corn Belt states covered by the Chicago Federal Reserve, 2014 cash rents fell an average of 2% this year and overall farmland prices fell 1% between Jan. 1 and April 1, the first quarterly decrease since 2009. Indiana and Illinois knocked 4% off their values during this period, Michigan slipped 3% but Iowa and Wisconsin advanced an average of 1%, based on surveys of 214 ag lenders. (See Chicago Fed's most recent report at http://www.chicagofed.org/…) To me, these results sound like a holding pattern, not a huge swing.

Not all forecasters believe farmland is poised for a 20% to 25% setback, however. As I’ve reported earlier, Bruce Sherrick, a professor of farmland economics at the TIAA-CREF Center for Farmland Research, sees few parallels between today and the 1980s, when U.S. farmland last experienced a rare but severe 50% correction. Not only are interest rates much lower today, but farm leverage is miniscule, farm incomes remain above their 10-year average and crop revenue insurance coverage now keeps a floor on incomes that didn’t exist in the 1980s. Sherrick sees much more stability in farmland values going forward, with no crash landing ahead. For details go to http://farmdocdaily.illinois.edu/…

Which way do you readers see farmland values heading next?

Follow me on Twitter @MarciaZTaylor.

Posted at 2:06PM CDT 06/05/14 by Marcia Zarley Taylor
Comments (16)
I see a correction coming.Be it 20-25% I don't know,but land value will have to follow what grain prices will support.Although I did just read in Progressive Farmer of land selling for 12,500 an acre to a investor and being leased back to the seller.I figured that guy can take the 5.5 million and pay his rent for 32 years and have a good retirement off the interest.So I don't think that invester hopes to see a 25% drop. Thats a 1.5 million lose.What did Cal mean crop prices have nothing to do with land ?
Posted by Raymond Simpkins at 8:51PM CDT 06/05/14
Folks: The land value equation has changed from the eighties. First, ethanol has turned corn into both an energy and food source. With 40% of the nation's corn crop going to ethanol production, that has permanently increased the demand for corn in the marketplace. Secondly, we had a president, Jimmie Carter, who put a ban on exportation to Russia. That hit the market very hard. Thirdly, the developing world is consuming more animal-source protein, requiring not only more grain for exportation, but more general demand across the globe, with much going to China. Finally, as long as we are in this zero-interest rate environment to lenders, people have very few options to their short term investments, outside of the stock market, which many people don't like nor trust. In the early eighties I purchased a 2.5 year CD that carried a 17.5% interest rate. Today, that same federally insured CD would carry a 1.0% rate. Also, if inflation picks up and interest rates start to rise, I want to own tangible assets, not financial paper. For me, I sleep much better knowing that my family owns farmland and paper promises. Now, I do worry about our government taking farmland away from people, but at that point, I would hope farmers would rebel.
Posted by tom vogel at 7:09AM CDT 06/06/14
One of my favorite Tweets this week was from an Iowa farmer who noted corn was $4--the same as when he started farming in 2010. Only problem is his rents are $100/acre higher. So it sounds like something has to give.
Posted by Marcia Taylor at 12:28PM CDT 06/06/14
This story doesn't focus enough on the seller's perspective. Recent increases in taxes on land sales mean that a seller could easily be robbed of 1/3 of their land for state and fed taxes. Sellers astute enough to resist being robbed will hold onto land (a desirable, tangible investment in the first place) and doing so will keep land off the market and support the price. But note that I'm not predicting land prices will go up.
Posted by Curt Zingula at 7:06AM CDT 06/08/14
When you think about profit margins in farming right now, based on the high priced land (and rent) there isn't a lot of wiggle room. If I am buying $12,500/A land, just accounting for principle, and a 20 year payback, my land cost is $625/A. Is that long term feasible? If I included a simple 5% interest cost on that that payment balloons to $1003 on an annual basis. If I factor in real estate taxes, you can probably add another $30 to $40/A easily. Looking at these numbers, you can clearly see that land cannot pay for itself in 1 lifetime. It takes additional land to do that. So in order for me to get this into a long term acceptable repayment range of say $250 to $300/A, I need to look to have either 75% of the purchase price in cash, or I need to mortgage 3 acres of land for 1 acre purchased or some combination of both. I personally believe a lot of the cash generated in the last 5 to 10 years has been spent already on either land, capital improvements, or machinery. I think until crop input costs start to moderate/drop, we will be 1 or 2 large crops away from potentially starting to see the start of the downhill slide. If you look back in the 80's, it only took the tailenders having to liquidate real estate that brought the whole system nearly to ruin. There are not enough available purchasers to soak up all the land if bottom 5% have to liquidate land. There will be too much surplus, which will start the downward spiral. How fast, long and deep will be known after it passes.
Posted by Pedro Sanchez at 10:00AM CDT 06/09/14
Curt I don't see that around here.There has been more land sold in the past 12 months than the last 10 years.If your going to sell, sell now.Land prices and taxes are not going to get better.Some investments have run their course.$700.00 land 30 years ago now selling for $10,000 don't see those kinds of returns sticking around much longer.
Posted by Raymond Simpkins at 10:03AM CDT 06/09/14
Cal, the price of crops DO have a bearing on the price of land. Historically, it has been the single most important factor affecting land prices over a period of time. You may not have noticed an effect of $4.00 corn (harvest price) corn on current land prices yet in your area because we are still in the very early stages of this change of the agricultural economic cycle. In the last break down of land prices, the effect of Pres. Carter's grain embargo in 1979 did not definitively show up in the land prices (in my area) until the fall harvest of 1981. It will take a year or two for farmers' cash reserves/flow to get dwindled down from the relatively lucrative/recent grain prices (of only this past year).
Posted by Unknown at 10:11PM CDT 06/09/14
Ray - Wow, that's way more land selling than what I've seen in Eastern Iowa! Where is "here"? Do those sellers understand that they've just accepted a 30% loss in value after taxes? And their new C.D.s (assuming they're not paying off mortgages as others suggest) won't offer the return of land rent. Other investments are risky too. Still, there are messy estates to settle, and that will always offer land to the market at any value!
Posted by Curt Zingula at 7:00AM CDT 06/10/14
Curt we live in southern Michigan where there has been a huge turnover of land.These sellers are mostly retired people with no mortgages.You are going to pay taxes on that money someday, Today 30%, 10 years down the road maybe 40%.Rents in this area are not all that high, you would be looking at rents in the $300-$350 range to compare to other investments and rents are not close to that.Dutch dairy farmers here will pay whatever it takes to buy land.Im not selling, but Im not buying at these prices either.
Posted by Raymond Simpkins at 8:52AM CDT 06/10/14
I think land is poised for a large correction. Unfortunately for me, I've thought that for 5 years now :)
Posted by Unknown at 12:23PM CDT 06/10/14
Ray, You're right about taxes going up - far left has made popular a book by an author proposing 80% tax for the top bracket! However, I'm not sure your "mostly retired" have considered stepped-up basis which will allow heirs to avoid capital gains if they don't see the tangible value you and I see for holding land. For most of the non-farming land owners in my area, land rent ($300 or more for good land) is supplemental to their own income or retirement benefits and they're not selling. Anyway, my point is basic Econ 101 - price discovery is a function of demand AND supply. If you're right and the land supply is surplus (like all the corn predictions) the value can only go down.
Posted by Curt Zingula at 7:07AM CDT 06/11/14
Curt, you touched on a topic (as well as Ray) about surplus land for sale/turning over. How much land do you think would have to hit the market in a region to produce a surplus? I wonder if this has ever been researched. With land running in the $10k+ acre range, my guess is it wouldn't take long to start to see saturation (2 to 3 land sales a month??)
Posted by Pedro Sanchez at 8:22AM CDT 06/11/14
I am not convinced that a large correction is coming. Being very close to the ag real estate market here in Nebraska, I have way more Buyers than I have Sellers. That plays into higher prices sticking around. If it is an Investment Buyer, they are a bit more conservative and are beating the bushes for good deals. I am seeing Investment Owners beginning to liquidate to take advantage of increased value...but they are not doing it in a wholesale way. And they are wanting to 1031 right into another land purchase. Conversely, the area farmers are scooping up almost any property when it becomes available for sale or lease and will hold onto it for the long term. Many have adequate financial reserves to not bat an eye at the price as they can leverage the cost across their entire portfolio. Others may sell some land and rent back freeing up cash to purchase a different farm. I do believe the marginal farms...those that have issues such as less desirable soils, power lines, canals, roads, etc. on them will not continue to bring top dollar. Nor should they. Now, if Capital Gains laws ever revert back to what they were a few years ago...you would see older landowners more willing to sell and that could potentially push the prices down some. Do I think that prices will drop 20-25%? I will know more in about 5 months...but if today is the barometer...my answer would have to be a definite NO.
Posted by Mike McCann at 8:25AM CDT 06/11/14
If the FED slows the printing presses, regardless of debt to asset ratios and rent rates there may well be a drop in $. Corn, milk and apples might not be a major factor in the per acre $ value. The Stock Markets, as well as other factors , here and abroad, are all part of the big picture.
Posted by Bonnie Dukowitz at 5:12AM CDT 06/12/14
Perhaps Marcia could answer our questions about seller motivation with a story based on Realtor responses. It appears that there are significant regional differences. BTW, I had to groan at Mike's inclusion of power lines lowering land values because I'm in the path of RICL's proposed wind transmission line. Those jokers want to commandere my field driveway to build their 14 story high line across the the entire section and not offer me a single dime more than my neighbors. Wind energy transmission to far away metro areas will lower a lot of land values!
Posted by Curt Zingula at 7:19AM CDT 06/12/14
Thanks for the assignment, Curt! I'm on the case. But it seems to me we see more motivated sellers among farm heirs and estates than retired farmers who want to cash out. Capital gains on farmland--especially land owned for decades--still provide retirees major tax reasons to keep a grip on land until death, when all lifetime gains are forgiven. What I am noticing is that large farmland investment firms are having success with sale-leasebacks to older farmers with no successors. The owners think now might be the time to pick their price, but retain a leaseback on their land for 5-7 years. Anybody in this camp?
Posted by Marcia Taylor at 10:11AM CDT 06/12/14
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