Are We Near a Peak in Farmland Prices?

Third quarter farmland price survey results have been reported by the Seventh, Ninth, and Tenth Federal Reserve Districts. Price increases were reported in Iowa and Illinois, and irrigated land was up in the Ninth District. Otherwise, average prices trended downward for the quarter.

Seventh District:

The Chicago Federal Reserve's district includes the farm rich states of Illinois, Indiana, Iowa, Michigan, and Wisconsin. Farmland went up on average 2% for the quarter, but was down an average of 4% over the past 12 months.

By state for the quarter:

• Iowa up 4%
• Illinois up 2%
• Michigan up 1%
• Indiana down 1%
• Wisconsin down 1%

For the year:

• Iowa down 7%
• Illinois down 4%
• Wisconsin down 3%

Ninth District:

The Federal Reserve Bank of Minneapolis, for the states of Minnesota, Montana, North and South Dakota, northwestern Wisconsin, and upper Michigan reported:

Nonirrigated farmland declined 6 percent in value, irrigated farmland prices were up 5 percent and ranchland value dropped by an average of 7 percent.

Over 50% surveyed reported lower income, especially hog and dairy farms, along with decreased spending and loan paybacks. There is concern over the fourth quarter and 2010 being break-even years at best.

Tenth District:

The Kansas City Federal Reserve's report includes the states of Nebraska, Wyoming, Colorado, Kansas, Oklahoma, northern New Mexico and western Missouri.

For the region, farmland prices declined moderately. Compared with last year's third quarter peak, nonirrigated land values dipped 1.7 percent, irrigated land values were down 3 percent and ranchland values fell 4.2 percent.

This region reported the largest decrease in farmland prices for the quarter since 1987. Wyoming ranch-land prices fell 10% and Nebraska land across all three land categories fell 5%.

Survey results indicated an expected drop in livestock income of 10% and of crop income of 15% from a year ago in this region. Credit conditions were eroding, also.

Observations of Current Conditions:

Although this year's harvest was expected to be a near-record, there are areas of the Midwest that have only 50% of the corn and soy harvested in late November due to abnormal fall weather with high moisture conditions. A combination of low grain commodity prices, the high added costs of drying, and an incomplete harvest to date, make fourth quarter results look challenging. There is a consensus that in the near term farm cash flows will be distressed and rents are trending downwards.

Since the overall amount of land turning over during the third quarter was low, yet prices trended downward in most states, one might expect continued lower prices given a time period of increased land sales in the future, should that occur. While agricultural land is viewed as a safe investment and is being purchased by various investment vehicles, caution should be taken in expecting guaranteed price appreciations, in part due to the overproduction of some commodities in the U.S., and should government fiscal constraints curtail supporting corn ethanol programs which exist now.

Credit Conditions:

Credit conditions are deteriorating some in the way of agricultural loan paybacks. According to the recent USDA Amber Waves report:

...At the end of 2007, 50 percent of farm business debt was held by 15 percent of farmers, compared with 30 percent held by farmers at the end of 1986....The capital structure of U.S. farms has changed over the last two decades. Fewer farms have outstanding debts than in the past, but debt carried is concentrated among fewer and larger farms....If asset values or incomes falter, the burden of these declines will fall on fewer and larger producers and their creditors.

Outlook:

Ranchland has depreciated most in price due to lower livestock prices. There is less demand for recreational land and high priced development and speculative land acquisitions due to the economic conditions. Ethanol plants are experiencing closures and challenging cash flows and have been the recent driver of corn price support. Producers continue to experience decreased returns with steady input costs. Rural agricultural community conditions are stressed, resulting in decreased area retail spending and rural job losses.

Conclusion:

It is very possible that we are still near a peak in farmland prices during this time period of real estate deleveraging. Whether you agree, most likely depends upon your outlook on the deflation vs. inflation question. Macro fiscal constraints required by federal debt burden levels, falling tax revenues, and future social spending requirements may dictate reduced government discretionary spending across all sectors, including agricultural price supports, in a not too distant future. This should be taken into consideration in evaluating how much to spend for agricultural land purchased today.

Disclosure: No stocks or ETFs owned.

Comments

[DeepValueLover]

We are near a peak in farmland prices only if you believe that the dollar is too valuable to collapse further against the commodities that the land produces.

As long as the Federal Reserve printing press is on turbo-overdrive...farm... prices have nowhere to go but up.

And that is a fact.

2009 Nov 25 08:16 PM

[Egg]

Farmland will continue to rise. It'll probably be the only real estate to rise in real terms.

The grains produced on farmlands are priced in dollars based on worldwide demand so farmland will continue to become more and more valuable in dollar terms as the dollar declines and ag inflation rises. Even if there is deflation farmland will rise, too. That is because Bernanke will flood the market with so many new dollars to stave off that said deflation, it'll force inflation eventually.

Unless protectionism takes hold and farmers are forcibly prevented from exporting worldwide, farmland will rise in (weaker) dollar value. That is the only scenario I could envision farmland not rising.

2009 Nov 26 02:00 AM

[Kalpa]

dvl and egg,
You obviously both believe inflation is where we're headed. I don't have a crystal ball, and am still worried about getting past working out of this deflation we're in. Our government will take on more debt to further bail out our banks before this is over. The reality is, either way, we have become a much less affluent nation. If farm programs and ethanol subsidies get scaled back, plus higher inevitable property taxes go up on ag land, and perhaps fossil fuel costs go up, you may see the ever squeezed farmer eek out less of a profit. And then, land will go down in value. The fact is there is a lot of overproduction of corn and soy in this country due to farm policy and the time may come that that policy changes. Then what happens to farmland prices? Times are too uncertain right now to make anything a "given". If, on the other hand, we are headed for inflation, right now could indeed, be a good time to buy ag land because interest rates are relatively low.

2009 Nov 26 01:12 PM

[T. Marc Schober]

I enjoyed the recap of the Fed reports.

I believe the recent reports from the district banks are proving that farmland is one of the best investments of our time. Down 4% YoY during these times is pretty good.

Farmland is an inflation hedge, just like gold. Farmland pays you to own it though. Over the past 20 years, US cropland has returned 12.5% on average through rent and appreciation, according to the USDA.

The reports show that farmland values are stabilizing. It will be difficult to ever buy farmland at these prices in the future. During these past few months, farmland’s selling season, many auctions have brought record numbers.

The reports showed that “good” farmland had retained its value much better than average or poor land.

Farmland Forecast featured highlights of district bank surveys as well. You can find them at:
farmlandforecast.colvi...
farmlandforecast.colvi...
farmlandforecast.colvi...

Creighton University also has a great Rural Mainstreet Index that surveys rural ag bankers. The November RMI at Farmland Forecast can be found at: farmlandforecast.colvi...

2009 Dec 02 11:29 AM

[RLD]

With farmland prices on the rise for good farmland, you must look at the inevitable,yes interest is still pretty low,but can you still afford it on borrowed money? Inflation is coming you can bet your combine on that.Well you say I better hurry and buy? Not so fast unless you have the money laying around burning a hole in your pocket. With record production,a weak beef and grain export market with declining prices in both, 2010 looks to be even worse. Remember with inflation, comes higher interest rates/higher input and operating costs ,all at a time of lower and declining markets.Remember the 70's and 80's. I know other countries are developing, and buying more, but they are also producing more using developing and advanced technology,putting more grain on the world market.Just be careful junior and use your head a little before raising your hand at the auction thinking there's no end but up,what goes up comes down.Ask the guys that went broke the first time. Some advice to the farmers, is let the investors buy the land and you farm it.You'll be glad you did until this rollercoaster slows down. When the stock market rebounds,there won't be as many interested in land,which will play a factor but the real land investors will stay,which is somewhat comforting. RLD

2009 Dec 14 01:28 AM