Farmland has turned out to be an amazingly resilient safety net through some hard times. And, there are no signs it is about to give way now.
"Farmers are the ones supporting land values. They came into the correction going back to 2013 prepared to buy land. They were smart. I guess you could say farmers and ag lenders all learned a lot from the 1980s."
That's Tanner Ehmke's take on today's land market. In a nutshell, it's working. It's not going anywhere.
Looking to 2020, this agricultural industry analyst for CoBank says there's every reason to expect this equity safety net can continue to hold some weight -- even after what has been a disappointing production year for many. If some in the farming community have to sell a few acres, their challenges will be seen as opportunities by not one but two tiers of buyers ready to step in. That will likely keep land prices from eroding in any significant way.
BUYERS IN THE WINGS
Randy Dickhut doesn't hesitate when asked if farmers are still first-tier buyers for cropland.
"They are absolutely the predominant buyers, and for a lot of reasons," says this senior vice president for real estate operations at Farmers National Co.
"Farmers are always looking to get acreage closer to their headquarter farms, or they want to add to their operations. Sometimes, they have had an eye on the property for years, and it's the first time that farm has been up for sale in three generations. They see sales like that as once-in-a-lifetime opportunities to buy."
Dickhut says they are seeing more acres changing hands in 2019 compared to last year.
"Here at Farmers National, we've had close to a 25% increase in the number of farm acres sold, but I'd add that has largely been driven by estate sales and a few larger ranch sales in the Northern Plains."
They've also seen an increased number of acres for sale in the Midwest in states such as Iowa.
"We are seeing larger tracts for sale there this year, in some cases whole sections of land," Dickhut continues. "That's unusual for Iowa. I do think there has been a small increase in financially encouraged sales, whether that is from a lender saying the farmer needs to make that move or the farmer or rancher making the decision on their own to shore up a balance sheet or improve cash-flow. It's hard to gauge, because a lot of what happens in the land market is quiet and behind-the-scenes. Oftentimes, farmers look for investors who will buy the land and lease it back."
The next tier of buyers for farmland includes a dizzying array of real estate investment trusts (REITs), as well as individual buyers looking to put dollars somewhere with a return beyond what the bond market can provide. Dickhut says while farmers are generally buyers on the higher-quality farmland, investors come in on average land and recreational land buyers on poorer-quality parcels.
"Investment funds are definitely more interested than they were several years ago, but they are very careful about what they bid on land," Dickhut notes.
CoBank's Ehmke adds when investors look at long-term investments today, they see 10-year bond yields below 3%. That makes the land market attractive.
"Look at capitalization rates on farm ground across most of the U.S.," he explains. "If you bought land for $1,000 an acre and rented it out at $30 an acre, you're at a 3% return. That's already better than the bond market."
Add to that the fact the farmland market is very illiquid. "There just aren't a lot of transactions going on," Ehmke reports. "Farmers hold on to land. It literally only takes a couple of local buyers to support the local land markets."
Ehmke says based on reports from the Farm Credit System associations, he's finding there aren't a lot of changes anticipated for the next 12 months from lenders.
"Anecdotally, I hear some bankers want to clear up lenders' sheets, so maybe they'll ask a farmer to sell that back 40 that's losing money in order to pay down debt. But, going back to how illiquid land is, because there aren't a lot of supplies out there, and you have investors in the wings to buy, you can't make a case that we're headed for a major correction over this tightening, especially when it's widely expected interest rates are going to continue to drop. Lower rates support land values. That is one thing we know for certain."
University of Illinois economics professor Gary Schnitkey has been impressed with the strength of farmland prices as well as cash rents this year. He expects stability in the land market to hold for at least the next six months but adds he is watching some key factors moving forward that have potential to erode those prices.
First, he believes farmers in his state will have less cash and more operating notes at the end of 2019 than they did at the beginning of the year. He predicts that will lead to an increase in unpaid operating loans over the next 12 months.
"This year is probably not going to be a good income year for our farmers, and next year doesn't look much better," he says. "One wonders how long cash rents can hang in there. Last year, we saw soybean prices before May at $9.50; this year, they were around $8.50. As land's earning potential declines, its overall value will have to follow. "
It may seem counterintuitive, but Schnitkey says a lot of his hopes for a stable land market this year are pinned on what is likely to wind up being a lackluster corn crop for much of the Midwest.
"I believe an increase in returns to farmers would have to happen on the corn side with yields not being as good as projected," he says. "It's likely this would push prices up. That could filter through to 2020, with that boost in income potential keeping cash rents up. If the market gives us something over $4.20 on corn, I think that scenario starts to look like a possibility."
It will be planting season before there's much clarity, he adds. "If we go into the spring, and lenders are telling farmers they can't issue operating loans based on prevailing cash-rent levels, we could see working capital erode through the year. One more year of that, and we are going to face another set of decisions -- and those likely will pressure land prices, even if this year doesn't."
YIELD OVER PRICE
Purdue University's Craig Dobbins is also of the opinion that one more year of mostly stable prices is ahead for land. He is also on the side that says even bad news as harvest yield numbers come in won't be bad enough to turn things around for the farm economy in short order.
"Supplies of both corn and soybeans are such that, in my mind, there is a low likelihood we will see a price rise big enough to turn this around for 2020," the agricultural economist in Indiana says.
"The problem is you're incurring a loss of yield, and this drives up the cost of production on a per-bushel basis. Generally, we don't see a price rise that's enough to offset that increased cost. My view of the world is that typically it just doesn't happen."
So, while Dobbins anticipates price stability for 2020 land values, he says on the whole, there are more negatives in the land market than positives.
"From what I see, there are a number of farmers who have to rebuild equity and pay down debt. The prudent thing, then, is not to bid aggressively on more farmland. That will have an impact on those buyers, even if we continue to see supplies of land on the market at moderate levels.
"No one, big thing will fix this," Dobbins continues. "It will take a lot of little things. I fully expect you'd find most farmers are already producing crops for less than they were a few years ago as they make efforts to reduce costs. But, this all takes time."
On the positive side, Dobbins notes while the price-to-cost relationship isn't good for many crop farmers right now, the land market remains tight.
"Buyers still have to convince sellers to turn loose of what they've got," he says. "So, yes, there is some erosion of equity because, if nothing else, a drop in farmland values themselves erodes your equity regardless of other things. The real concern is will people have to borrow more to get to next year and lose equity because of it?"
WHERE THE MARKET GOES
Land brokers are generally optimists when it comes to land prices, which makes it worth noting that this year it's tough to find one who wants to make a case for farmland prices going up. At best, expectations are land prices will remain stable to slightly down.
Farmer National's Dickhut says, "I believe that if anything, we will remain fairly steady in the land area. There will still be some downside pressure, but we will find support in lower interest rates. If we do see an unexpected supply of land come onto the market, you may see some regionalized pressure. I don't see a scenario, however, where prices are likely to go up in the next year."
CoBank's Ehmke says anything that benefits net farm income will be a positive driver for land values, and there is a case to be made the market might be in for a positive surprise.
"Lower interest rates are supportive for land values, and trade policy will play a strong role. If we can improve exports and lift net farm income, that makes a way for positive land vales. I also think more government intervention like the Market Facilitation Program payments will play a positive role."
Purdue's Dobbins doesn't see anything on the horizon likely to cause farmers to suddenly decide to start selling land in large quantities. That is key to keeping prices strong for now.
"I think uncertainties created with the future lead to a natural status quo. While it's likely equity is eroding, that hasn't happened to the point where we've seen it upset the land market. To really make a case that land values would climb there would have to be an unexpected disruption in supply or demand, enough to optimistically cause things to rise. On the whole, as things stand today, for 2020, I see more negative in the market than positive."
University of Nebraska agricultural economist Jim Jansen also brings a down note to the outlook.
"It appears market value of farmland may gradually slide in the next 12 months, but it's a gradual decline. Maybe up to 2% in some areas," he says.
Schnitkey notes all eyes will be on the 2020 planting season, because that will tell the story for land values moving forward.
"We will be watching things closely this spring," he says. "Don't underestimate the importance of cash rents in the equation, because where they go will play a large role in determining the direction for land values over the next year. Right now, I'd say there is great resilience in our ag economy, and I think most farmers are in good positions."
The Weight of Corn:
It's long been held the two major forces influencing land prices in agriculture are the value of what the land is used to produce and prevailing interest rates for loans to buy the land. Of these two forces, University of Nebraska agricultural economist Jim Jansen says profit uncertainty is clearly the leading fundamental in many major grain-production areas today.
"On the side of interest rates, we are seeing policies put forward by the Federal Reserve that maintain, or even lower, the land market's prevailing interest rates. So, the ability of a producer to secure financing at very competitive rates still appears present in this market," he explains.
However, Jansen believes market values for farmland may gradually slide in the next 12 months. This would be driven by increased supplies of farmland in the market, which historically Jansen puts at 1 to 1.5%.
A look at the USDA's most recent numbers on cropland values points to an interesting dynamic when considered as a five-year trend. In the agency's "Land Values Summary," states showing the largest declines in cropland values over that time are also large producers of corn.
Between 2014 and 2019, the report reveals only a handful of states moved up or down in cropland values by at least $500 per acre. Of those states that took a dip, corn was a major part of the crop mix. Those were also areas where land prices are considered to be at a premium.
Indiana, Iowa and Nebraska all showed five-year losses of $500 or more for cropland values during that time. In Indiana, there was an $840 drop between 2014 and 2019; in Iowa, a $1,490 drop; and in Nebraska, a $790 drop.
There were far more winners than losers during that five-year period, however. States that saw cropland values climb by $500 or more included Alabama (+$580), Florida (+$690), Kentucky (+$750), Louisiana (+$500), Mississippi (+$510), Ohio (+$750), Tennessee (+$510) and Wisconsin (+$500).
This could lend credence to the idea that more diversification in land use makes farming operations less vulnerable to large swings in land values.
Nebraska's Jansen notes his state's farmland acres are divided largely between two major types of enterprises: row-crop production (primarily corn) and the beef industry's cow/calf sector. He believes there is a gap between when different types of land peak and fall in terms of pricing.
"We saw the market value of cropping acres peak earlier, followed in 2014 by a peak in nontillable grazing land. As a result, I think prices on that nontillable land came off the peak a little faster, as it has followed the cropland market," he explains.
Taken as a whole, the USDA report for 2019 tells a story of five years of stable land prices with mostly minor ups and downs since 2014.
Cropland across the U.S. averages $4,100 per acre, a 1.2% increase over 2018 and slightly up from 2014, when the average per-acre price was $4,090. Pastureland averaged $1,400 per acre, a 2.2% increase on the whole. In 2014, that average price was $1,290. It's important to point out these numbers are a compilation of the good and the bad, and their highest value is in seeing trends.
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