Sure grain prices are a tiny fraction of their 2012-13 peaks. Last year's net farm incomes averaged a negative $3,000 among Illinois Farm Business Farm Management Association members, down from a whopping $298,000 profit in 2012. That's for modest farms averaging 1,131 tillable acres of corn and soybeans. Farmers in other Corn Belt states have suffered similar whiplash during ag's boom-bust cycle and face prospects of possibly two more years of lean returns.
Amazingly, those vanishing farm profits have had little effect on farm real estate so far. "Farmland values in most states are only off by single digits," contends Bruce Sherrick, director of the University of Illinois's TIAA Center for Farmland Research. That's confirmation that the sky isn't falling on farm real estate, he said, and there's little chance of repeating a 1980s-sized farm real estate correction when Midwest land collapsed 40% or more.
Paul Pittman, CEO of Farmland Partners, one of the nation's first farmland real estate investment trusts, agreed. He has added $500 million of farmland acquisitions in the past year. "People are either confused or overly negative," Pittman said. The fact that land values have slipped only by single digits, despite big drops in current income, reflects its strength as an asset class, he added.
PROOF IN ACTUAL SALES
Peak Soil Indexes published by DTN show actual Nebraska irrigated and dryland sales prices relatively flat since mid-2015. Wisconsin actual sales averages still hover near an all-time peak. Indiana levels have been a little more volatile, but now run close to their 2013 level, certainly no catastrophe. (DTN Grains Pro customers can find Peak Soil Index charts updated weekly on the Farm Finance page, under Farm Business.)
Likewise, Louisville-based Farm Credit Mid-America, one of the nation's largest farm real estate lenders, recently found that farmland values in Indiana, Ohio, Kentucky and Tennessee held steady between July 1, 2015 and June 30, 2016.
That's in contrast to USDA's annual report released in August which showed much steeper declines, said Dennis Badger, vice president of collateral risk management for Farm Credit Mid-America.
The Farm Credit System lender bases its studies on appraisals of actual arms-length transactions in the Mid-America region, whereas USDA relies on farmer opinions for its national survey. Some university land value surveys also rely on opinions of lenders, appraisers, farmers and auction companies for its farmland reports rather than verified sales data.
Badger believes opinion surveys are sometimes skewed because respondents may be relying on limited or local information. They also may not be privy to a number of private transactions that never hit public listings or auctions.
"Opinions can be a precursor of trends, however, sometimes folks believe things are better or worse than they currently are," Badger said. "What we can attest to, using market data with closed sales transactions, is we've not seen anything near the declines that have been indicated in opinion surveys."
While Farm Credit Mid-America appraisers estimated that land values in Indiana declined about 6% last year, they believe this decline is on pace with a soft landing in markets. It hardly reversed consecutive gains of 27%, 23%, 21% and 10% between mid-2010 and mid-2014. Additionally, Kentucky and Tennessee are still experiencing increases in farmland values due to recreational and urban expansion, which brings the overall 2015-16 average rate of change in the Mid-America territory to a 0.2% gain. In other words, steady.
"Farmers have been as prudent as one would hope...During 2010-12, they were able to prepare for the rainy day," Badger said. USDA's latest commodity price forecasts indicate the farm economy could see two more lean years ahead, he said, unless unforeseen circumstances like weather or world events turn around the over-supply of grains worldwide.
"However, operations that have been careful and cautious monitoring their balance sheets and make business decisions will weather this small downturn with little difficulty," he added. "Those that might have been more aggressive in purchase decisions such as equipment and real estate will be ones to seriously reevaluate their positions to make sure they haven't over-extended themselves."
The advantage now compared to the 1980s, is that land markets remain healthy, so operators have time to refinance or sell land without experiencing fire sale conditions. "The market is healthy right now. Supply and demand are in balance," Badger said. If owners choose to sell now, he added, they won't sacrifice much compared to their investment value of several years ago.
Landowners will continue to see pressure on cash rents over the next 12-24 months, given USDA's commodity projections and the fact operators are buckling down for two more lean years, Badger said.
However, a brief decline in rental proceeds shouldn't impact property values much, he added. "Part of that goes back to the proposition of land economics where people buy land typically for anticipated benefits. Provided the purchaser is forecasting beyond a two-three year holding period, I believe most would expect the market will regain itself and this is just a minor hesitation or perhaps a minor decline. To a certain degree, it's a healthy thing every 5-10 years to have a small pullback to make sure the market hasn't outpaced itself."
EDITOR'S NOTE: The University of Illinois's Sherrick and Farmland Partners' Pittman will speak on farmland's prospects at the DTN-Progressive Farmer Ag Summit in Chicago Dec. 5-7, discussing what’s different about 21st century farmland corrections, the potential shift in farm ownership and where markets are headed next. For an agenda and other details, go to www.dtnagsummit.com
Follow Marcia Taylor on Twitter @MarciaZTaylor
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