Farmland: The Teflon Asset

(DTN illustration by Nick Scalise)

CHICAGO (DTN) -- Each year, DTN publishes our choices for the top 10 ag news stories of the year. This story was oday we No. 8, which isabout how land prices resisted the commodity crash.

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Grain prices may have hit a rough patch since 2013, putting a cap on farmland values. So far, however, real estate dips don't come anywhere near matching that steep 40% to 50% plunge in commodity prices.

"If we're in a farmland bubble, I can't see it," contends Bruce Sherrick, director of the University of Illinois TIAA Center for Farmland Research. By December 2016, he estimates, Illinois land values will have slumped 10% or less from their all-time peak. That's after a phenomenal 27-year appreciation spree.

Post-harvest sales don't reflect the gloom and doom pessimists expect. "End-of-year mid-state sales have been incredibly strong and have a few folks wondering if the bottom is in," Sherrick said.

Even with minor dips the last few years, consistent U.S. farmland growth rates since 1970 have generated "astronomical" returns, he added, averaging 10.54% annually. Sherrick believes that steady performance is one reason wealth funds and institutional owners have been attracted to farmland ownership in the last decade.

Peak Soil Indexes also show farmland's resilience. They track 30- and 60-day running averages of actual land transactions in six bellwether states. By Peak Soil's gauges, Nebraska irrigated farmland dipped 6% from all-time highs through November, Illinois farmland was down 8% from peak; Iowa and Minnesota were off 12%; and Indiana down 13%. Outlier Wisconsin was still flirting with an all-time high. (DTN Grains Pro subscribers can find farmland charts updated weekly on the Farm Finance page, under Farm Business).

Some opinion surveys have not been as bullish as Sherrick. For example, Iowa State University's annual November survey estimated average values for Iowa land down about 17.5% from their 2013 peak, with a value of $7,183 per acre. While they've declined three years in a row, the state's farmland remains 173% higher than in 2004, the survey found.

Like Sherrick, most ag lenders aren't worried about a farmland panic in the core Corn Belt this time around. They expect more distressed borrowers to be forced to sell land, leaving markets weak until late 2017 to mid-2018. However, unlike the 1980s, a series of factors are buttressing asset values:

-- Most ag lenders have enforced strict loan-to-value ceilings on farm mortgages. At Farmer Mac, an $18 billion portfolio, borrowers average about 50% equity on their loans, so hold much more cushion than previous farm owners did to weather cycles.

-- Crop revenue insurance was only created in the mid-1990s, but today almost 90% of the nation's corn, soybean and wheat acres are insured, mostly with this improved coverage. That means droughts like 1983 or 1988 don't put operators out of business with the vengeance they did in the past.

-- Farm Credit System institutions report 70% of their farm real estate debt carries fixed-rate terms. In the 1980s, virtually all farm real estate debt fluctuated with the market, subjecting borrowers to rates 16% or higher when Federal Reserve policy reversed. In this low-rate cycle since 2008, many borrowers have been able to lock in mortgages at around 4%.

-- Institutional owners and wealthy investors still view agriculture as a solid diversification to their stock and bond portfolios. Sherrick believes there's a new pool of nonfarm buyers helping to keep values afloat even when the neighbor next door runs out cash.

Past performance is no promise of future returns, but 45 years of records show U.S. farmland has been remarkably stable.

So don't chicken out on farmland dips, Sherrick advised. "If you picked the worst time to buy in the 1980s, you recouped your losses within six or seven years." That means if farmland investors plan to own land for the duration, they are likely to be rewarded long-term, no matter when they buy.

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

Follow Marcia Taylor on Twitter @MarciaZTaylor

(GH/ES/AG)