Mixed Messages

The price floor under farmland started showing a few cracks this year. It didn’t fracture everywhere or on all types of land. But, in Iowa, where prices have set new benchmarks over the years, there was a marked change between March and September.

Too early to call this a trend, Kyle Hansen says the downturn coincided with trade wars and a drop in the soybean market. He’s not prepared to say it’s more than a correction but admits it’s a definite anomaly.

Hansen is an accredited land consultant with Hertz Real Estate Services, out of Nevada, Iowa. He is also chairman for the Iowa Chapter of Realtors Land Institute land trends and values committee, which conducts a biannual report on farmland trends and values across the state. The report is divided into nine crop districts. Findings are based on a survey of brokers in the state and refer to bare, unimproved land with sale price on a cash basis.

In March 2018, all nine districts in the state reported increases in land values going back to September 2017. Those gains ranged from 1.7 to 4.3%. In the second part of the year, gains were largely erased and, in some cases, surpassed by losses. The report shows anywhere from a level market to one that dropped 3.9% for the six-month period.

Taken as a whole, the state’s statistics still show land prices are up 1.2% from September 2017 to September 2018. But the noteworthy shift in that latter period could be a harbinger of things to come.

“What we think we are seeing is that we had higher commodity prices in the spring with soybeans around $10 per bushel at the elevator in March. After the tariffs were in place, we saw those prices drop down close to $8 per bushel,” Hansen explains. “This, along with corn, is one of our biggest crops. As you know, corn prices have been challenged for some time. So now, because of what happened in the soybean market, our net farm incomes are lower, and that is weighing on decisions to buy land. How much can a farmer afford to pay? It’s more uncertain today due to world trade agreements. There’s a lot of hesitation in the market.”

OPPOSING INDICATORS. Purdue University’s land report underscores Hansen’s point that the market is sending a lot of mixed signals. Craig Dobbins, professor of agricultural economics at Purdue, notes Iowa’s December 2017 report indicated average values of farmland had increased 2% over 2016. The March 2018 report out of Nebraska, however, showed a 3% decline there compared to 2017 figures. Minnesota’s February 2018 report showed an 8% decline. The point is there’s no clear direction.

“These reports illustrate your experience with changes in farmland values is likely to depend on where you are located,” Dobbins says. The 2018 Purdue Land Value Survey, he adds, indicates a mix of increases and decreases in Indiana farmland values and cash rents.

That report shows from June 2017 to June 2018, there was a 2.4% increase, and it was on poor-quality farmland. Top- and average-quality farmland rose less, at 1.6 and 2.1%. This is in opposition to the generally held belief that across the Midwest, poor-quality land is where the biggest price decreases are being seen. Dobbins says there’s no real difference between a 2.4% increase and a 2.1% increase. The takeaway is all qualities of farmland are moving together. There is no bright line test between land of one quality and that of another.

“My story is that farmland values tend to move together, across all qualities of land,” he explains. “I hear the anecdotal reports that would have us believe otherwise, but, often, those comments are from people in the business of finding farmland for those who have money to buy. Their focus, understandably, is on that top-quality land, and I think that leads to some bias in these ground-level reports.

“I believe farmers are biased toward the farm closest to them. If there’s a choice between two nearby properties, and one is better quality than the other, that would be their choice. But, there’s a strong locational preference.”

IMPACT OF SUPPLY. While the story line for several seasons has been that land supplies are tight, the industry is now at a turning point where that could change quickly.

“Supply is one of the factors we’re watching closely,” Hansen says. “Supply was low moving into harvest, and that has historically kept prices higher. But, we are seeing a lot of price volatility even with that limited supply. Good farms in weaker economic areas or in areas with poor growing conditions are not seeing bidding that’s as competitive as it was in the past. Tight margins are beginning to show up, and farmers in those areas aren’t looking to aggressively expand.”

Hansen adds while Iowa has a reputation for premium-priced farmland, it’s been Illinois that has often led the way on land values, partly because the state allows farmland trusts and real estate investment trusts (REITs) to purchase land.

“There can be more competition with a broader buying base,” he says of these types of markets. “Iowa doesn’t permit corporate ownership, and the state strongly protects family farming operations. You’ll see that Iowa may not be the most expensive land on a per-acre basis in the Midwest, but it’s because it is more directly reflective of what is occurring in agriculture. Seventy to 80% of the farmland here is purchased by farmers. If things are going well, we see it. If things are tight, we see that too,” he notes.

Hansen adds a recent survey from Iowa State University indicates 82% of all farmland in the state is currently debt free, which he believes is supportive to values.

CHAPTER 12 CONCERNS. Looking nationally, CoBank’s Tanner Ehmke says he’s seeing some reports regarding farm debt he finds concerning. “One thing we’ve been looking at with our partners at Farm Credit Associations is the amount of farm debt, comparing real estate versus non-real estate debt,” he says. “Real estate debt is going up very fast.”

It’s not because farmers are buying a lot of land. Instead, Ehmke says they are borrowing against the land they own to stay in business--dipping into equity. There is also an increase in Chapter 12 filings.

“Working capital is declining,” Ehmke says. “Strong land values have enabled a lot of operators to stay in business. I don’t know if I’d say we’re at a turning point in the land market, but I’m prepared to say it’s a concerning trend. When farmers who have depleted their working capital start borrowing against equity, it is a red flag.”

He stresses this seems to be a regional situation right now, largely around the Midwest and Northern Plains states.

“This is about local markets. If farmers in your area are stressed and want to sell land, it can seriously impact that local market. When land values drop due to increased market supply, those producers teetering on the edge because their debt-to-equity ratios aren’t great now have a balance sheet that’s out of whack. So, they declare bankruptcy and sell. It’s a domino effect.”

Steffes Group broker Tim Meyer is based in Iowa and concurs there is more discussion around the issue of bankruptcies than a year ago. He agrees with Ehmke that it’s very regionalized. It’s also hard to predict.

“I recently sold a farm with a strong CSR [corn suitability] rating for a record price here in the state,” he reports. “Typically, we are seeing buyers pay 115 to 125 per CSR point on land--that’s pretty standard. We saw an outlier that was 143 per point; we’ve seen one at 150 per point. It’s hard to know what to do with those sales.”

He says in most cases, they are seeing land sales like this financed with outside income. Two of the bidders on the record sale, he notes, had outside companies--including a trucking company in one case and a hog operation in the other.

“They had incomes outside of the traditional corn and soybean row-crop farm,” Meyer says. “They are basically subsidizing these land purchases through those enterprises.”

Even diversified farm operations today, he says, are having a difficult time creating cash-flow.

“The profit has been taken out of the livestock side of things,” Meyer notes. “History tells us that viable farmers who continue generation after generation are diverse. Maybe there’s a livestock portion of the business or a trucking side. But, for the first time in a long time, when you look across agriculture, there’s not much in the way of profit anywhere.”

He adds that as cash-flow goes, so will equity.

“As we move forward, something has to give; and, with $3 commodity corn, it just doesn’t make economic sense,” he says. “Yields are really quite good, which makes farmers feel better. But, lenders are encouraging cash-flow to happen. A lot of them are talking about lowering cash rents. As that happens, the price of farm ground should follow, and equity will follow that.”

On the plus side, Meyer says if the trade wars are ironed out, the market may see a 10 to 15% increase. But, he says that won’t be enough of a change to make farmers profitable.

WELL-INFORMED DECISIONS. The story is much the same in parts of Kansas, where Mykel Taylor, ag economist at Kansas State University, follows land values and says the major factor she’s noticed moving into the end of 2018 is the drop in the number of sales.

“We’ve seen a 31% drop in land sales between 2014 and 2017,” she says. “That decline in inventory has restricted supply and helped support prices. We’ve seen the market soften a little, but it’s mostly stayed flat through 2018. I really think this is due to limited supply.”

In the wake of four poor years of profits across the state, Taylor echoes what others are saying: There is a reason to be concerned about a drawdown of resources.

“We have a lot of producers who came into the last four years with a good amount of working capital after some really good seasons. They’ve been burning through that money. Because that money has been used in many cases as working capital, I think it’s delayed the impact on land values. That was their cushion to get through the hard years.”

Using this cushion has helped farmers avoid eroding asset values, she adds. Balance sheets have stayed strong. But, what happens when the cash runs out?

“There is a confidence that this is going to turn around, and we just need to make it till that happens,” Taylor says. “The problem is the forecast is not spectacular. So, when do people start to get out? When do they scale back? When do they take land equity?”

Taylor says she’s reasonably confident producers in her area can hold out a little longer but not indefinitely. The key, she believes, is eliminating uncertainty through settled trade agreements and seeing commodity prices rebound. She’s concerned higher interest rates will add to the negative situation, as this strengthens the dollar and weakens the U.S. trade position.

“We can adjust to quarter-point increases slowly,” she says of interest rates. “But, there’s a threshold at which they start to affect the cost of paying back operating notes, and that is when there’s a problem.”

Taylor adds the industry is in a cash-flow crunch, with many producers paying too much for rented ground and higher-priced inputs.

As for whether bankruptcies will indicate where the sector is headed, Taylor says they are a lagging indicator of farm economy health.

“Bankruptcies happen after the damage is already done,” she explains. And, as pressure mounts, decisions aren’t always the best in a business sense.

Taylor says should producers feel pressured to sell in the coming year to address cash-flow issues, it’s critical to think logically, not emotionally, about which land to get out of.

“Ideally, if you had land to sell, you did it three years ago; but, we all know it’s not about where you’ve been, it’s about where you’re going. Do producers tend to sell the lower-quality land first? Do they sell the land that’s costing them more to farm? Do they sell the land that is the furthest away? Or, do they make emotional decisions because of the history of a piece of land? There’s a lot that goes into the decision to sell land, but if you wait till everyone else is selling, the fallout just clouds your ability to make a good decision.”

Taylor advises consulting with a neutral source, such as a licensed appraiser or farm manager in the area. They are not only able to tell you what land of a certain quality is worth today but can be very helpful in making decisions to sell. And, while appraisers generally charge for their analysis, Taylor says it’s like paying for a good attorney.

“Appraisers evaluate the data not the anecdotes,” she explains. “Emotions are coming into a lot of decisions for our farmers and ranchers now, and some are being driven by distress. That’s not how you make a good decision.”

CASH-FLOW CRUNCH. So, where is it all headed? The USDA’s annual land values report tends to make a case for a level land market going forward the next 12 months. Going back to 2014, cropland prices nationwide have stayed mostly flat, ranging from a per-acre average of $4,100 to 2018’s average of $4,130. A $30 difference is hardly relevant statistically.

Ten years ago, the cropland value looked very different, at $2,760 per acre. While some regions had higher average figures, some lower, what’s important is to note the nation as a whole and how cropland prices have trended since that 2008 mark. It’s also worth noticing commodity prices during the same 10-year period.

Between 2008 and 2018, cropland prices in the U.S. jumped an average of $1,370 per acre, a near 50% increase. Average corn prices in 2008 were $4 per bushel; average soybean prices, $11.32 per bushel. Compare that to 2018, when DTN analyst Todd Hultman says a good average for corn is likely to be approximately $3.35 per bushel; for soybeans, $8.70 per bushel.

So, while land as in input cost has gone up 50% in the past decade, the price for the crop produced on that land has actually declined.

In contrast, pastureland values have not been as exaggerated, climbing 27.5% in that same 10-year interim. And, feeder steers, which were selling in 2008 for an average of $102.98 per cwt (Oklahoma City), are projected to end the year with an average between $145/cwt and $147/cwt.

LAND PRICE PROJECTIONS. With so many unknowns as the industry moves toward year’s end, land value projections are anyone’s guess.

Most analysts say they see no more than 5% to the downside. In some scenarios, a case can even be made that land prices go up 5%--a minority view based on a strong resurgence in exports and a flurry of positive trade announcements.

“I honestly believe if we could remove some of the uncertainty in the land market and see grain prices rebound a little, we could be steady to 5% up,” says Hertz’s Hansen, who categorizes his outlook as cautiously optimistic. He also allows that prices in his area could decline as much as 5% if tariff wars continue, and commodity prices don’t improve.

CoBank’s Ehmke says given the consecutive record years Americas’ producers have seen on yields, it will take more than an improvement in trade to change the direction of land prices. He characterizes the land market as being in a period of downward pressure and fears growing Chapter 12 bankruptcies will compound problems.

“I just don’t see farmers getting the financial break they need right now,” he says. “While high yields have kept a lot of farmers in business, in many situations, they are hanging on by a thread. I think many of them are going to have to resort to more borrowing, and this will come at a higher cost.”

Possibly the most positive outlook comes from Steffes Group’s Meyer. He believes there could be a 10 to 15% increase in the Midwest land market if trade issues are ironed out. And, he adds, even if some farmers are selling, others will be buying.

“Farmers with good equity positions are still very interested in the farm across the road and will compete to buy it. For them, we may be moving into a period of opportunity,” he says.

“Farm Credit in our area is loaning up to $5,300 per acre to buy farmland. The rest is subsidized from another farm and the equity there, or a cash position. Those farmers who are in the position to take advantage of whatever is coming in the farm economy will see this as a chance to add to their land holdings.

For More Information:

> CoBank

> Hertz Real Estate Services

> Kansas State University

> Purdue Agricultural Economics Report

> USDA Land Values 2018 Summary

> Relying on land equity for operation costs is an increasingly risky move.

> Consult a certified land appraiser before making a decision to buy or sell land in today’s market.

> Outlook for land prices is mixed, with 5% to the downside and as much as 15% to the upside.

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