Spike in farmland values favors large operations, spooks lenders

2011-11-05T08:00:00Z Spike in farmland values favors large operations, spooks lendersBy Georgina Gustin, Lee Enterprises Iowa Farmer Today
November 05, 2011 8:00 am  • 

If you ask farmers how many acres they own, you’re likely to get a shuffling, roundabout response, if any at all.

“It’s a pretty sensitive question,” said Charlie Nordwald, an auctioneer with Wheeler Auction & Real Estate, which specializes in farmland auctions. “It’s sort of like asking them how much they make.”

These days, the subject of acreage is particularly touchy for many U.S. farmers.

Farmland values have doubled over the past decade, as commodity prices have soared and net incomes along with them. In some areas of the Midwest, farmland values have jumped as much as 25 percent in the past year. Auctions, which have become a preferred method of buying and selling land, are turning into spectacles.

“You have two people who want a piece of land, and they start fighting over it,” said Mike Duffy, professor of economics at Iowa State University. “We had a sale in Northwest Iowa, and it went for $16,750 an acre.”

That figure was a record for Iowa, where farmland values are among the highest in the Midwest. Farmland owners, in fact, are sitting on some of the most- attractive investments around.

 

“THE STOCK market is unstable, and doesn’t look very appealing,” said Ron Plain, professor of agricultural economics at the University of Missouri. “As an alternative investment, farmland looks very appealing.”

Retired farmers are reluctant to sell their precious ground, making land even more scarce and driving up prices. Many farmers are buying or keeping land to rent it out to other farmers at rates that could rise by 25 percent this year, according to some estimates. Some landowners and farmers are even working out new rental arrangements pegged to commodity prices.

“Do you sell it and get the record price, or do you keep it and have the income stream?” asked Jason Henderson, a vice president with the Federal Reserve Bank of Kansas City, which, like other reserve banks, conducts land-value surveys. “A lot of people aren’t selling because they don’t know where to put their money.”

Some farmers, many flush with record incomes, are simply putting their money into more land — if they can find it. Some attend auctions to see what land is going for in their area.

“It’s really gone crazy,” said Larry Clarke, a farmland real estate agent, at a recent auction north of Columbia. “But, there haven’t been enough transactions this year to get a feel for what’s going on. We’re just here to see what’s happening.”

10-year-old boom

The surge in Midwestern farmland value began, most analysts say, about 10 years ago when commodity prices started their march upward. In 2006, when federal ethanol mandates kicked in, demand for corn shot up along with prices. Roughly 40 percent of the nation’s corn goes to ethanol now, compared with 1 percent 30 years ago.

“Really, it goes back to ethanol and the mandates for ethanol, which elevated demand for corn and limited the supply,” said Steve Witges, a regional lending manager with Farm Credit Services of Illinois. “Corn is the barometer for income on these farms; it’s the primary driver, and profitability has been very strong.”

In the past two months, commodity grain prices have fallen roughly 15 percent. But, long term, most economists don’t see demand dipping, even though prices may level off, while farmland holds its value.

“We see China, India, Brazil, where incomes are rising and (there is) higher demand for meat,” Duffy said. “So, demand for land is going to stay strong worldwide.”

Global appetites are, indeed, another factor driving up U.S. farmland prices. So is the larger economic picture. “The real drivers behind this are commodity prices and interest rates,” said Jeff Swanhorst, chief credit officer with AgriBank in St. Paul, Minn. “The broader economy is struggling and there’s pressure to keep interest rates down.”

Lower interest rates mean farmers can afford to spend more.

“It’s an unusual combination. We had this tremendous run-up in corn and soybean prices and we had very low interest rates,” Plain said. “That really allows people to pay a lot for farmland.”

While most of the buyers putting in bids at auctions tend to be farmers, investors also have gotten into the game. Foundations, state retirement systems, hedge funds — they have all turned to farmland, although it’s difficult to gauge how much acreage they have snapped up.

The extent of this nonfarm investment is difficult to track, and so is its influence.

“The speculative behavior is one we all have trouble with,” said Scott Brown, an ag economist with the Food and Agriculture Policy Research Institute at the University of Missouri. “You have a lot of investors with nonfarm backgrounds looking for a safe haven, other than the stock market.”

Future fears

Lenders have become concerned about the sharp rise in values, and particularly worried speculators were behind a possible bubble. The concern is high farmland values will tank, taking farms and livelihoods along with them — a repeat of the 1980s farm-credit crisis. Earlier this year, the FDIC convened a meeting to discuss the issue.

Ultimately, though, analysts, economists and farmers see key differences between now and the 1980s. Farmers are in less debt, interest rates are lower and demand seems poised to grow.

“We don’t have the same high leverage and, overall, the agriculture industry has a lower debt-to-asset ratio,” said David Oppedahl with the Federal Reserve Bank of Chicago. “Right now, farmers have quite a bit of cash from several years of good production, so they have big down payments. A lot of times, they won’t even use a loan.”

Still, most economists don’t expect the climb in land values and incomes to continue. “I would argue we’re going to plateau,” Plain said. 

 

BUT, A plateau won’t help existing farmers expand or young farmers get into the business — and that has some analysts worried. With an aging farm demographic, agriculture needs more young farmers. Typically, young farmers start out renting land. But, at today’s rates that prospect looks less attractive. Meanwhile, buying land is getting beyond the reach of all but the wealthiest farmers and corporations.

“The higher land values make it really hard for a new farmer to get into the business,” said Kelly Smith, director of marketing and commodities for the Missouri Farm Bureau Federation. “Not only does it take a lot of money for land, but equipment.”

Some worry higher land values could continue to force smaller farmers out of the game and create more consolidation in agriculture. If that happens, some worry  rural economies could keep declining. In the meantime, things look pretty good for those who can afford to farm.


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