Stubbornly Stable

Land prices remain resilient in spite of falling farm income.

While net farm income levels have declined 40 to 50% from the highs six years ago, by comparison, land values have declined only 15 to 20%, Image by Dan Miller

Despite a fifth year of lower commodity prices and projections for negative profit margins in 2019, farmland prices continue to hold the line.

Farm Credit Services of America, based in Omaha, Nebraska, reports benchmark farm values are down 1.4% for Iowa compared to six months ago but up 0.7% compared to a year ago. In Nebraska, farmland values decreased a slim 1% in six months, barely changed from the 0.9% drop from a year ago. South Dakota’s farmland values slipped 0.6% in six months and are down 2% compared to year-earlier levels. Wyoming saw an increase of 3.1% in six months, holding close to a 3.6% increase reported for the last year.

“If you’re watching commodity prices, tariffs and the farm bill, you’re thinking land prices should go down,” says Steve Bruere, president and chief executive officer of Peoples Company, a real estate and farm-management company based in Clive, Iowa, with business in 22 states.

“The No. 1 thing I’m watching is percent of farmer buyers in the farmland market,” he explains. “As long as farmers are 70 to 80% of the buyers, land prices will have strength. Investors not willing to pay high prices are on the outside of the market.”

Farmers are willing to pay top dollar, because they are buying for the long term, Bruere believes. They are not looking for an immediate return on investment, and they will accept a capitalization rate of 2.5 to 3%. So, if the cash rent is $275 an acre with a cap rate of 2.7%, that implies a land value of $10,185 per acre--an amount an area farmer might be willing to pay for the right acquisition.

However, investors generally shop for land with a 4% cap rate. So, the same piece of property renting for $275 an acre would only be worth $6,875 per acre to an investor.

“If the land market switches to farmers being only 60% of the farmland buyers, that tells me sellers are willing to accept lower prices that investors offer, and that can fundamentally change the market,” Bruere notes.

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In 2018, 80% of Iowa farmland buyers were farmers, 11% were local investors, 6% were out-of-area investors and the remaining 3% were like-kind exchange buyers and others. Since the market peak in 2013, the percentage of farmer-buyers in Iowa has bounced between 75 and 81%, according to Iowa State survey data. INVESTOR INTEREST REMAINS HIGH

Nearly 900 attendees from 30 states attended the 12th Annual Land Investment Expo, in Des Moines in January. Bruere, whose company hosted the event, says they set a record for attendance. He says he even received text messages throughout the conference from clients in New York and San Francisco, all interested in buying land.

“Even in these challenging times for agriculture, farmer attendees are looking for trends, and nonfarmers are becoming more interested in how their food is produced,” Bruere explains. “Part of it is the millennial food movement and their increasing desire to connect with the source of their food. That trend is becoming more mainstream.”

While row-crop land prices aren’t yet at levels attractive to investors, Bruere says interest remains high.

“I get calls every day from farmers who would like to quietly sell an 80-acre parcel, but the seller doesn’t want his neighbor to know, doesn’t want an auction nor a brochure printed,” Bruere says, adding that’s sometimes a tall order, because the seller also wants top price.

“Sometimes, they call relatives or another landowner they have [in mind] who might be interested in buying,” Bruere says.

Randy Dickhut, senior vice president of real estate operations with Farmers National Co., says there has been an increase in these “quiet sales” to neighbors or investors. In these cases, the land is never exposed to the market to determine a true market price.

FEW DISTRESSED SALES BUT WORRIES FOR 2019

Bruere, Dickhut and Jim Knuth, senior vice president at Farm Credit Services of America, all agree there haven’t been many forced sales.

“Most of the land sales are still estates and trusts, some divorce situations, some farmers letting go of pieces that aren’t core to their operation,” Bruere says.

Several lenders at the Land Investment Expo, when asked about distressed sales, noted land is the last thing a farmer wants to sell. Most of their borrowers have reigned in family living expenses, cut farm costs, pursued additional income sources (on- or off-farm) and sold nonessential machinery. In 2018, high soybean yields, preseason marketing, Market Facilitation Program payments and expense controls kept many farm borrowers above water and able to their pay bills. Lenders and real estate brokers are worried about 2019.

“We’re starting to hear more talk about financially stressed farmers in areas who may have to sell a farm or other assets to improve their financial condition,” reports Sam Kain, area sales manager in Iowa and Wisconsin for Farmers National Co. “Only 3% of our sales last year were due to financial stress, but we may see an increase in these in 2019.”

While net farm income levels have declined 40 to 50% from the highs six years ago, land values during the same time period have declined only 15 to 20%.

“Farm Credit Services of America’s borrowers have an average owner’s equity position of 69%, strong liquidity with an average current ratio of 2.52-to-1 and strong repayment ability with an average debt-coverage ratio of 1.91-to-1,” Knuth reports. They have also brought significant equity to their purchases with an average loan-to-collateral value of 48%, and many locked in longer-term fixed interest rates during 2018.

“The business of agriculture continues to reward producers who are increasing their financial and marketing acumen,” Knuth continues, and that puts some producers in the position to buy more farmland.

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