In July on an early morning drive in east-central Indiana, Don Thurston gave a tour of the 3,600 acres he farms. A longtime no-till practitioner in both corn and soybeans, he spied a cluster of waterhemp near the edge of a field.
"I'm sorry, when I see it, I have to get out and pull it up," he said, laughing. As he yanked up the weeds, he talked about the various farms he owns and rents. There is the first 130 acres he and wife, Heidi, purchased for $100,000 after getting married.
"I thought, 'How will we ever repay all of that?'" said Thurston, 55. "My dad reassured me, 'You're going to be OK with this.'"
Then there is the 125 acres he purchased from four cousins that is as much sentimental as it is productive. The land had been owned by an aunt who had inherited it from her father who, in turn, had inherited it from his father. The road running past the farm bears the name of that grandfather.
"After me, I don't know that my kids or anyone else will care about that," Thurston said. "It made sense financially to buy it -- I was already renting it. But, I wanted it because it was my aunt's."
FARMLAND IS COMPLICATED
Sure, it's an investment and a business asset, but it's also personal history and emotion. Additionally, land purchased as an investment may not necessarily be good for the businesses' cash-flow.
"Financial advisers preach about separating the land investment decision from the operating decisions," Thurston explained. "I'm cognizant of that, but those two things come back together anyway."
Thurston has never taken the decision to purchase land lightly. "The effect on cash position is one of the reasons to be cautious about buying land," he said. "I'm doing the same shock test that my lender will do. I want to have a large enough cash down payment to where the annual payments aren't going to cause a problem in the future."
The strategy that Thurston has come to -- dictated by capital and operational needs -- has been to own roughly one-third of the land he farms while renting the rest.
"Renting two-thirds really helps the cash-flow position," Thurston said. The money that doesn't have to go into land purchase payments essentially helps build capital and creates the down payment for the next eventual purchase.
Like Thurston, most farmers remain optimistic about an investment in farmland. In a recent national survey conducted by Purdue University, 52% of producers see farmland as either a good or "extremely" good investment. A significant portion of respondents, 23%, believed farmland was a "poor" investment.
The generally positive outlook owes much to the belief that the fundamentals in farming are strong, said Nicole Widmar, an ag economist at Purdue. "We don't think the survey would have looked anything like this in 1985," she said, referring to that decade's extremely high interest rates, low commodity prices and resulting farm debt.
Only an estimated 2 to 2.5% of farmland changes hands each year, explained Bruce Sherrick, professor and director of the TIAA Center for Farmland Research, at the University of Illinois. Nearly half of those sales are "arms-length" transactions between family and friends that never hit the open market.
"Institutional investors [like TIAA] still represent a very small fraction of the overall market," Sherrick said.
That productive land is a good investment -- even when compared to other investments -- is undeniable. Since 1990, the National Council of Real Estate Investment Fiduciaries (NCREIF) has compiled an annual average return for farmland that includes both appreciation and income.
The most recent NCREIF farmland index showed an annual return of 7.09% for the year ending Dec. 31, 2016. That compares to a return of 10.35% in 2015 and 12.63% in 2014. The total return consists of income from crops as well as appreciation in the value of the land. The 7.09% total return for last year was the lowest total return since 2009. Annual cropland, as opposed to permanent crops like nut and fruit trees, had a total return of 4.71% for the year -- the lowest since the index was introduced in 1990.
As farm debt levels have ticked upward, the culprit doesn't appear to be farmland debt but production costs. Sherrick said farmland represents 80%-plus of farm assets but only 57% of its debt.
There are still plenty of cautions being sounded. Craig Dobbins, an ag economist at Purdue, can show the trend line of land values in Indiana from 1910 through 2015. If the natural trend line were followed through 2020, the average per-acre price would be $5,396.
Instead, the actual average Indiana land price now is $7,150. The implication is that land values could fall back another 24% if the trend line were to hold.
In the Purdue survey, 39% of respondents said they believed farmland values would rise during the next five years -- but only by a total of 7%. "That's a very small move in farmland values over five years," Dobbins said.
What optimism there is for farmland values within the ag sector doesn't spill over into the financial sector. Numerous commentators have suggested that the farmland "bubble" is bursting. They cite weakening commodity and land values, as well as upticks in farm debt levels.
In the Federal Reserve Bank's 10th District, including Kansas, Missouri, Nebraska and Oklahoma, 15% of bankers reported they denied more than 10% of applications for operating loans in 2016. The year before, only 5% of bankers reported they denied operating loan applications at that rate.
In Indiana, farmland values were down about 9% from 2015 to 2016. Nonetheless, the popularity of farmland for those who are farming is one of the reasons someone such as Thurston has to consider any potential piece of property. You never know when, or if, it will come for sale again.
"Growth has always been a part of my plan," Thurston said. "But, your perspective changes as you get older. If I were to buy land right now, I'd likely be making payments on it when I'm 70. I'm not sure that's appealing to me."
The Thurstons' two sons do not plan now on joining the business. "In our situation, even if they don't farm but inherit our land, that is a pretty cool situation to leave my heirs."
As it is, Thurston believes they can someday live just fine in retirement off the rental income from more than 1,200 acres they own. "An annual return of 3.5% doesn't sound sexy, but it is steady," he said.
"I had tried my hand with an IRA and other investment vehicles," he said. "But, I understand the risks and rewards of farmland, and understand the ups and downs. I can't keep up with the equities market."
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