Farmland Markets Steady

All Calm on the Farmland Front

Farmland sales are holding their own despite a 40% to 50% drop in farm revenues since 2013. (DTN chart)

CHICAGO (DTN) -- Chicken Little alert: The sky isn't falling on land values, argues Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois. True, average prices have dipped the past two years. "But adjustments have been far less extreme than the change in income or commodity markets, debunking what you hear in the popular press," he says.

"I'm not going to predict where markets are headed," Sherrick told attendees at DTN-The Progressive Farmer's Ag Summit this week. "But capitalization rates of Illinois farmland values (rents divided by land values) closely track with 10-year Treasury bonds. Since 1970, the only time it's been out of whack is the 1980s. If we're in a farmland bubble, I can't see it."

Investors may account for some of that support. Unlike the 1980s, land markets are no longer limited to a pool of local buyers, Sherrick says. That means "this cycle doesn't depend on how much money your farm neighbor has to spend," he adds.

Expanded interest from real estate investment trusts, pension funds and other institutional owners have helped stabilize prices in investor-friendly states like Illinois and Indiana, he believes, even though he estimates they own only about 2% of the nation's farmland.

PAST PEAK

Admittedly, Iowa's values may have slipped about 12%, according to Peak Soil Indexes -- more than other I-states. But Iowa also experienced a larger uptick during corn's boom years. Actual sales of good-quality Iowa cropland even bounced back over $8,000 an acre in November (see chart). Both Minnesota and irrigated Nebraska cropland remained relatively stable in those same studies, supporting Sherrick's thesis.

Institutional investor Paul Pittman, CEO of Denver-based real estate investment trust Farmland Partners, will have amassed 133,000 crop acres over 16 states largely since 2014. But he believes it's no time to curtail farmland purchases: Sherrick's studies show the rare setbacks in land appreciation since 1970 typically rebound quickly. Even if you bought Illinois farmland just before the 1980s crash, you would have recovered your losses in just six or seven years. So history has rewarded those landowners who bought for long durations.

"This remains a great time to buy farmland, because we know it's not at peak," Pittman says. "The markets weren't fooled that $6 corn was permanent, so they won't have to retreat as much now corn prices are at $3."

NERVOUS LENDERS

But lenders remain cautious should more sales filter through the market in the year ahead. MetLife Agricultural Finance, one of the nation's leading mortgage lenders, expects U.S. farmland's "first significant corrections since the mid-1980s" with an average 20% slump from peak values by 2018. Thirty years ago, land values crashed more than 40% in the space of a few years.

Rabo AgriFinance analyst Sterling Liddell believes Midwest land values already may be off 10% to 15% from highs in many areas, with prospects for up to 25% decline from peak by 2018. He worries that "new corn" regions in the central Dakotas, eastern Nebraska and Kansas could contract even more as low corn prices weed out least-productive farmland.

Those "fringe" Grain Belt states converted about 9 million to 10 million acres of pasture to row crops since 2010, he says, much of which needs to be idled to bring supply and demand back in balance.

"Investors are influencing this market, though they may not be completely visible," Liddell adds. At the moment, "professional" investors tend to avoid bidding wars, buy privately or negotiate deals after auction no-sales. They favor mid-level or lower-quality land with potential for improvement, he says. They won't succumb to emotion and pay top dollar for the farm next door, Liddell says.

SOFT LANDING?

Even a 20% to 25% haircut in peak land values is no catastrophe. Most row-crop areas in the U.S. saw double-digit, year-on-year growth in nine of the 12 years prior to 2014, Rabobank says. Midwest farmland will ultimately be settling at about 2012 values, Liddell believes, with most farm landowners retaining plenty of their lifetime wealth in real estate. In his estimation, a return to 2012 valuations is what markets can sustain given crop prices stuck at $4 or $3.80 corn for the foreseeable future.

"It's not going to be like the stock market after Lehman Brothers blew up in 2008," Sherrick says. "It's a relatively calm market for farmland."

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(AG)