Minding Ag's Business

Corn Belt land markets came back to life this spring, thanks to the temporary price rally for 2014 crops at planting, this week's Farm Credit Services of America analysis shows. But local trends remain inconsistent and whether farmers have the cash to reinvest in land after harvest could be a huge question given deteriorating crop prices.

FCS America executives interviewed by DTN describe Iowa as stabilizing, while Nebraska, South Dakota and Wyoming land values continued to notch gains. Of the 23 benchmark farms it uses for bank appraisal purposes in South Dakota, land values jumped 5.8% in the last six months and remain 13.6% ahead of June 2013 levels. Nebraska's benchmark farms gained 2.2% in value year over year, while Iowa remained about 3.7% below 2013 levels even after a strong spurt in the March through June sales season. Limited and diverse sales in Wyoming made assessments difficult, but its one-year appreciation was pegged at 9.5%.

Farm Credit's mid-year compilation of all land auctions gives a slightly different picture than its benchmark results, in part because representative farms may not match the geography of all recent sales. In Iowa FCS America found cropland values again hitting all-time highs after quickly rebounding from first-quarter lows that had not been seen since mid-2012. The region's largest real estate lender found unimproved ground sold for an average of nearly $10,200 during the second quarter of 2014, up from $10,000 a year ago. More than half of all public sales in the state chalked an average per acre price over $10,000, although nowhere near the record $20,400 per acre received in Sioux County or the $19,700 per acre notched in Mitchell County.

"Northwest Iowa is as high as it's ever been, in part due to bids between neighbors willing to pay a premium on small tracts," said Mark Jensen, senior vice president and chief risk officer for FCS of America. But Jensen characterized that as a localized situation and noted that tracts larger than 80 acres and marginal ground in other parts of the state don't fare as well in the bidding.

Over a 10-year period, South Dakota still leads the four-state region with 333% appreciation, a fact that Jensen attributed to its transition from wheat, small grains and sunflowers to higher value corn and soybeans. While undervalued in the past, corn-soybean yields there are becoming comparable to Nebraska averages, he said. Unimproved South Dakota cropland values declined sharply in early 2014, but prices recovered to about $5,500 per acre by the end of the second quarter.

At the moment, Nebraska "is a mixed bag," Jensen said, with the western part of the state just pulling out of a multi-year drought and the eastern part of the state more stable. Over the last five years, strong demand for irrigated ground helped state averages for all land appreciate 144%. Dry cropland prices have held at $5,200 to $5,500 per acre during the past nine months, while irrigated ground leveled off at $7,300 per acre with limited sales.

Whether land markets stay robust through the remainder of the year would require Jensen to "put on his Carnac the Magnificent" hat, he said, referring to Johnny Carson's famous fortune teller character. "It's difficult to predict. All indicators are that we'll have another solid crop, despite areas of flooding and hail" in parts of the region this summer.

Farm Credit leaders assume that rebuilding U.S. and world grain stocks will mean most farmers sell the 2014 corn crop in the $3.80 to $4.80 range, and probably closer to $4 than $5, he added. That's far below the record $6.89 growers posted on the 2012 crop. How that impacts farm profitability--and potential cash for capital purchases and future cash rents--largely depends on how much land a grower owns, lenders note.

Iowa State University budgets estimate 2014 corn breakevens at $4.60 based on average yields and return for operator labor and rent. So big renters remain disadvantaged compared to those with more owned land in their portfolios and could be projecting losses by fall, depending on the size of their crops. "If we look at all of our customers, someone with 3,000 acres paid for, their cash flow is $3.50," Jensen said, so they have more cushion to weather the current price climate.

"The solid majority of our customers are well positioned to take on this price environment," Jensen added, noting that 82% of their customers have locked in terms on real estate mortgages, so will continue to benefit from the Fed's discounted interest rate policy. "Over time there will be adjustments in input expenses... but we've stress-tested our portfolio with $3.50 corn. There's some deterioration and clearly some impact, but we feel good about the majority of growers. The worst case scenario would be if this situation lasted five or six years, inputs stayed high and prices stayed low." Even solid producers would feel strain under those circumstances, he added, "but generally cycles don't last that long."

Farm Credit lenders believe lower corn prices are here to stay, maybe taking some of the bloom off springtime farmland bids in the future. "But we're not anticipating an '80s scenario," Jensen said.

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