Minding Ag's Business

Avoid Land Buyer's Remorse

Evidence seems to point that farmland is at a tipping point. No-sale land auctions are becoming more common. In November, opinion surveys by two of the three Federal Reserve Bank districts reported a dip in values. Ditto a recent Creighton University survey which pegged its farmland value index the lowest in four years.

In fact, Purdue University economists estimate Midwest farmland values could tumble 15% to 25% if corn futures hover near $4.50 and soybeans $11 for the next three years, and interest rates inch up about half a point. That's not a swan dive, but it could wipe out a lot of equity going forward.

So if you're in the market to acquire land now, how do you avoid buyer's remorse later?

Play by the numbers, Kansas State University Economist Kevin Dhuyvetter and former economist-turned-farmer Terry Kastens believe. The pair has refined their own personal ag investment strategy over the last decade and remain selective buyers even now. They target 9% return on assets, using moderate leverage of 50% with fixed rate mortgages. Having a long-term horizon on land ownership--say 30 years or longer--also helps correct for short-term mistakes.

Over history, farmland has provided decent returns for investors and owner-operators. Between 1951-2013, non-irrigated farmland from 39 states averaged annual returns from rent of 5% plus 6.5% capital gains, for a total return of 11.5%, they found. The stock market generated 8.5% annual gains, plus 3.2% dividends, or a total of 11.7% during this same time period, but it subjected owners to far more volatility.

Besides sticking to those guidelines, the most important principle is to make good buys rather than trying to time the market, they say. Routinely land changes hands anywhere from 70% to 130% of the going market, so it's important to know your local trends, Dhuyvetter says. Don't get caught in the emotion of bidding, the fallacy of comp sales or over valuing attributes like distance from your home base.

Surprisingly, their top recommendaion was to disregard some conventional wisdom. For example, current corn markets turn out to be poor barometers of farmland returns 5 years in the future. If you'd followed a buying model based on corn price, you'd have earned 7.8% returns on average Iowa farmland since 1966 versus 14.8% with a model of buying every year.

Likewise, using another common economic indicator--capitalized value--is no better than "gut instrinct" they say. In its simple form, it capitalizes rent by dividing by interest rates. Market land values haven't been below the capitalized value since about 1970, however. Think of the capital gains you would have missed as Kansas land ballooned tenfold or Iowa zoomed from a few hundred dollar an acre to almost $9,000.

Using rent-to-value ratios as a buying signal worked better. Buying Iowa land when the ratio is below its 5-year average yielded12.3% since 1957, but still less than buying land every year.

The method preferred by Dhuyvetter and Kastens is an online spreadsheet, KSU-Landbuy, which automates future value calculations of cash rent and capital gains after taxes for you. Find it at http://cwww.agmanager.info/…

"If you still want to purchase land, use a mechanical procedure such as KSU-Landbuy to ensure decent buys," they say. Park the emotions back home. This is the way to "beat" the market.

Over history, farmland has provided decent returns for investors and owner-operators. Between 1951-2013, non-irrigated farmland from 39 states averaged annual returns from rent of 5% plus 6.5% capital gains, for a total return of 11.5%, they found. The stock market generated 8.5% annual gains, plus 3.2% dividends, or a total of 11.7% during this same time period, although it subjected owners to far more volatility. Still, all over-heated markets are subject to correction.

"Like other ag economists, we'd say we're darn close to a tipping point in farmland," says Kastens. "But is it merely going to slow down? Flatten or will it drop? If you're a farmer rather than an outside inventor, and are worried about where we are, just rent the land you need for your operation."

To see Dhuyvetter and Kastens' presentation from the DTN Ag Summit on this subject, go to http://www.agmanager.info/…

Follow me on Twitter@MarciaZTaylor



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1/18/2014 | 7:16 PM CST
In what way does crop insurance reward poor farmers. The better you produce the more you can insure. That seems like an incentive to be a better farmer. Crop insurance is a must for the farmer that borrows money. Which is every farmer that didn't have his farm handed to him. I will agree that overfunding mega farms has been detrimental to overall production and has put a pinch on small farms, but the answer to the problem is certainly not 0 government programs. Read "the grapes of wrath" if you think that will end well for the average farmer. A phaseout in the subsidy for crop insurance as your acres increase would benefit agriculture and the country far more.
Raymond Simpkins
1/3/2014 | 1:41 PM CST
If corn stays below 4.00 crop insurance will be a dead horse anyhow.And yes crop insurance has drove up the price of all inputs I hate to tell you Aaron.Poor farm managers can even survive if the goverment takes care of you.Look at health insurance why work when someone else is going to buy your policy.Crop insurance has made alot of poor farmers look like good ones.Its time for it to go!
W Kuster
1/3/2014 | 7:50 AM CST
Aaron - see http://farmdocdaily.illinois.edu/2013/11/lower-crop-insurance-guarantees-2014.html
Aaron Cross
1/2/2014 | 12:57 PM CST
W, Considering we don't know what the price of corn will be in March when Farmers in my area sign up for crop insurance, and considering that there have been no changes to the crop insurance regulations as of yet, I stand by my original statement. It seems that you are the one whom is either not informed or honest W.
W Kuster
1/2/2014 | 12:48 PM CST
Bonnie clueless - The amount of federal crop insurance revenue guaranteed per acre and who would be able to purchase federal crop insurance would be two different topics.
Bonnie Dukowitz
1/2/2014 | 5:19 AM CST
Crop insurance, W. is available to anyone who is willing to pay the premium. I think an obsession has possessed you.
W Kuster
12/31/2013 | 6:47 PM CST
How many decades have we had of politicians targeting the largest and wealthiest farmers in the country with cash and insurance benefits of the greatest value. These mindless government farm programs have been a major factor in depopulating rural America of smaller farmers. In order to level the playing field for all farm businesses, all farmers are equally deserving of government benefits of comparable value. It is time for politicians to stop harming smaller farmers by depriving them of the government benefits they award the wealthiest and most profitable farms. Stop taking money from the taxpayer and better yet give all farmers the same equal benefit of $0. Removing masses of smaller farmers from rural America and replacing them with just a few monster farm operations is not a step in food security for the nation. Politicians pontificate how government farm programs are all about food security for the nation, but choose to ignore those financially harmed by this mindless government targeting of the largest benefits to the wealthiest and most profitable.
W Kuster
12/31/2013 | 6:30 PM CST
So nothing with federal crop insurance has changed Aaron? Where can you still buy a crop insurance revenue product guaranteeing you $1000 per planted corn acre? You could at least make the effort to be a little bit informed and honest Aaron.
Aaron Cross
12/31/2013 | 12:02 PM CST
I would like to know where all the EWG bloggers like Bill are. One of their biggest claims is that crop insurance drives up the prices of land, but now that crop prices are down and nothing with crop insurance has changed (no farm bill yet), why do you suppose the price of land is decreasing? Quite perplexing I must admit. . .