Landowners may be paying a price for pursuing the golden temptress of commodities. Where the allure of $8-a-bushel corn led to tilled-up pastures and torn-down fences, remorse seems to be setting in.
"In our part of the country, a lot of properties that were converted from pasture to row crop are beginning to have serious issues with erosion," said Kurt Hollenberg, a broker with United Country Real Estate and Auction Services, based in Columbia, Missouri.
He said some of these converted operations would like to go back to fences and grass, but many landowners are not in a position to make the shift.
"Now that row-cropping is not making them as much money, they'd like to go back to cattle; but at $13,000 to $15,000 for a mile of good fencing, it's an expensive change to make," he pointed out.
That balance between land for row crops and land for pasture has been at the center of much of the market's evolution going back to 2006. While the tendency is to talk of land price and land use in regard to what that acreage can yield in terms of cash, there is another way of looking at it, said Sterling Liddell, Rabobank vice president of Food and Agribusiness Research Advisory Group, Missouri.
"It's scarcity of land to produce a given commodity that drives prices higher and higher," he explained. "In 2006, we saw a fundamental change in how we price corn and soybeans. Essentially, there was not enough corn to make the market comfortable and allow it to find equilibrium. Then drought drove commodity prices even higher. Now, we are seeing a point where we can produce a surplus."
The pressure to find more land to produce corn and soybeans when prices were at historic highs shifted acreage for those crops outside of traditional regions. The Northern Plains is where the biggest part of that growth took place. Now that prices are lower, and the beef market is in a growth phase, there is a shortage of land for livestock operations, especially in those areas where conversion to cropland took place.
"Pasture and rangeland are where we see the strongest values, and that goes back to that interaction between regions," said Liddell. "In the Dakotas, where a lot of pasture was converted, you've seen the strongest movement in pasture prices. Those acres have been shorted, and with the expectation of adding 3 million to 4 million head of beef cows, we need that pasture back. We will see this continue until there is a rebalance of crops and pasture."
In the Corn Belt, Liddell said a downturn in cropland prices is good news because it will help the industry stay economically feasible. He said he's seen signs of contraction through no-sales at auctions across Illinois, Iowa, Minnesota and Nebraska. With a break-even margin for farmers of around $4.20 per bushel on corn, Liddell said there are essentially only two places producers can make sizeable adjustments to the cost of doing business.
"It's hard to move seed prices. Maybe you can adjust nitrogen, potash and phosphate down a little, but not a lot. It comes to machinery and land. Those two will battle it out for who gets the rest of the income," he explains. "Historically, when prices drop around breakeven, we see about 15 to 20% of the value of the crop going to machinery, 30 to 40% to land."
Liddell expects continued moderation of land prices in the near future, with upward movement possible again in four to five years as global demand for protein grows. It's that long view that has kept investors enamored with farmland. While farmer/buyers dominated the land market the past seven years, investors are poised to jump back in if the price is right.
WATER AND DIVERSITY
Linda Niebur, a broker associate with Mason and Morse Ranch Company, out of Colorado, said the investor/buyers she works with are very interested in the Southeast. She sells farmland across the country.
The fresh market (where there's no need to track a commodity market) plus water availability combine to make the Southeast a hot region of the country now, Niebur said. She thinks there is going to be an abundance of land for sale in the year ahead in some areas, as banks tighten up on loans and producers find themselves overextended. That spells opportunity and will likely lead to prices more acceptable to investors.
Overall, land values will tend to be sideways, she added, even in the Midwest. That is assuming the land is very, very good in terms of quality.
"There may well still be some increases in cropland prices in some spots and on some pieces of property. We are absolutely going to continue to see neighbors trying to outbid each other. If they have cash and no problems with the banker, they are in a strong position. But you won't see investors in that situation, because when you put that down on a piece of paper, it doesn't make sense. The good stuff is going to stay good on price, and the medium- and poor-quality ground is going to fall off faster and faster."
INVESTORS AND RETURNS
Missouri's Hollenberg agreed, saying he's seeing Class A-type land holding its own. In addition, he reported REITs (Real Estate Investment Trusts) are coming in and buying larger tracts. Class B-type farms, on the other hand, are reducing rental rates and falling off more on a percentage basis when it comes to value.
"Investors have to see a rate of return, which is why they have been on the sidelines. But they are willing to buy with the right rate of return, so they are becoming more active in the market," Hollenberg said.
He added supplies of Class A-type cropland continue to be tight in the Corn Belt, with buyers resistant to pay what sellers want, and sellers resistant to lower their prices.
"We are seeing a bit of a tug-of-war right now," he said. "Finally, someone will wear out. Commodity prices will be a part of that."
Rabobank's Liddell points out in Iowa, investors were buying nearly 50% of the farmland sold prior to 2005; today, that class of buyer is more like 20%. As investors look to come back, he adds it may be an opportunity for farm operators who need financing to find a partner.
"It will all depend on how strong their balance sheet is. The key to being attractive to potential financiers will be data flow from the farm. Farmers who can control their input costs and show where risks are and how they are mitigating those risks will be very attractive to investment groups," he believes.
As this year's farmland market continues to settle, most analysts and brokers describe it as sideways in character. Cropland prices are expected to decline, in some areas by as much as 5%. Pasture and rangeland prices, however, are more likely to increase by 5%. One would essentially cancel out the other.
Should interest rates increase, even 1%, that will impact prices negatively, as there is an inverse relationship between land prices and interest rates. However, Rabobank's Liddell said he believes that going into the end of 2015, the land market has already priced in an anticipated interest rate increase.
R.D. Schrader, president of Schrader Real Estate and Auction Co., in Columbia City, Indiana, said while an increase in interest rates could well push land prices down in some areas, he's not expecting anything dramatic.
"Over the years, interest rates have been a big variable in the land market. The historically low rates we've seen have certainly benefitted land prices. Sooner or later, though, there is no place for interest rates to go but up. When that happens, if it's slow and methodical, the market can handle it."
A LOOK AHEAD
Regional differences can make for huge variances in land price, whether it's traditional row-crop property or pasture. The USDA's Land Values 2015 Summary, for example, shows the average price for an acre of cropland in the Corn Belt at $6,840; that same acre of ground in the Northern Plains averages $3,130.
This year's land-price outlook includes projections broken down by region. These projections, by editors at The Progressive Farmer, indicate a steady land market overall, with more opportunity for buyers. For the full report, see the story in the Nov. 1, 2015, issue "Land Price Fallout." What follows is a brief recap.
-- Corn Belt. Taken as a whole, cropland in Illinois, Indiana, Iowa, Missouri and Ohio averages $6,840 per acre. Pasture comes in at a much more moderate $2,440 per acre. During the last year, cropland prices trended down just 2.3%, while pasture prices moved up 3.4%. For the year ahead, expect level to continued downward pressure on cropland (0 to 2%) and continued upward movement for pasture (1 to 2%).
-- Lake Region. Michigan, Minnesota and Wisconsin average $4,670 per acre for cropland and $2,250 per acre for pasture. Cropland prices remained mostly unchanged during the past year, but pasture prices jumped 15.4%. For the year ahead, cropland prices are poised to drop (3 to 5%), while pasture prices continue to climb at a somewhat slower pace (even to 5%).
-- Northern Plains. Kansas, Nebraska, North Dakota and South Dakota played pivotal roles in the expansion of row-crop acres at the height of the corn market. Prices average $3,130 per acre for cropland and $1,020 per acre for pasture. Prices for both increased in the last year, up 1.3% for cropland and 6.9% for pasture. For the year ahead, cropland prices are expected to decrease slightly (level to 2%), while pasture will be up again (3 to 5%).
-- Southeast. This southern region, which includes Alabama, Florida, Georgia and South Carolina, is a hot draw for investors thanks to water availability and the potential for more diverse crop production. Cropland averages $3,770 per acre, almost the same as pasture, which averages $3,790 per acre. Prices for cropland were up slightly at 1.1% over the last year, while pasture values held level. For the year ahead, cropland is likely to fall slightly (even to 2%), while the price increase in pasture is expected to balance that out (even to 2%).
-- Delta Region. Arkansas, Louisiana and Mississippi are seen as offering high-quality cropland at bargain prices when compared to the Midwest. Prices for cropland average $2,600, a 3.6% increase over the past year. Pasture is a more moderate $2,320, a 2.2% increase. For the year ahead, cropland in the Delta region will be down slightly (even to 5%), while pasture will trend up (even to 3%).
-- Mountain Region. Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming make up the biggest region the USDA reports on. Prices for cropland average $1,740 per acre, a 3% increase over the past year. Pasture prices average $614 per acre, a less than 1% increase. Looking ahead, cropland will trend up (even to 3%). Pasture will also move up as beef operations look to continue expansion (1 to 2%).
-- Southern Plains. Recovery in Oklahoma and Texas continues in the wake of drought. Oil and gas returns have brought resources into the market. A downturn in that area may slow growth, but cattle operations and high-quality ground will continue to pull the money. Prices average $1,780 per acre for cropland, a 9.2% increase during the past year. Pasture prices average $1,570, a 1.9% bump. In the year ahead, cropland may sag (even to down 3%), while pasture continues to reflect a strong beef industry (up 3 to 5%).
-- Appalachian Region. States in this region, which includes Kentucky, North Carolina, Tennessee, Virginia and West Virginia, are some of the most heavily influenced by urban areas. Cropland prices average $3,830 per acre, a 1.3% increase in the last year. Pasture prices average $3,350, a 2.1% climb. For the year ahead, cropland will likely fall (1 to 3%), and pasture will climb (even to up 4%).
For More Information:
USDA Land Values: www.usda.gov/nass/PUBS/TODAYRPT/land0815.pdf
Kurt Hollenberg: www.missourilandandhome.com
Linda Niebur: www.ranchland.com
R.D. Schrader: www.schraderauction.com
Sterling Liddell: www.rabobankamerica.com
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