Some farmland investors are waiting in the wings, hoping for a chance to buy their preferred asset at more realistic prices, now that average cropland values seem to slipping. Warning: Deep discount shoppers may have to be patient.
One wealthy Iowa investor from near Waterloo tells me each parcel should stand on its own 5% cash return (including property tax) on purchase price, so he hasn't added to his portfolio in at least five years. His top cash rent runs $275/acre today, something that wouldn't make sense if he invested in the average $8,000 Iowa acre now. Most of his 2016 rents will run closer to $225/acre.
"I can get 4% on tax-free municipal bonds, so why would I want to buy farmland yet?" he told me over a lunch last week.
When to pounce? If you want a predictor of how low farmland values are headed and how fast, watch gross farm income, advised Iowa State University Economist (Emeritus) Mike Duffy at last week's American Bankers Association ag conference. He's tracked farm real estate values for three decades with a "near-perfect" formula: For every 2% drop in gross farm income, you'd expect cropland values to dip 1%, Duffy says. It's worked for nearly every period except the 1970s, when inflation expectations distorted land markets.
But consider 2015 corn revenues will have fallen 40% since peaking in 2012, a loss of $30 billion in annual income, according to USDA's most current farm income estimate. "Good" quality Iowa farmland has only dipped about 8.5% since its 2013 high, according to the Peak Soil Iowa Farmland Value Index (http://goo.gl/…) which measures actual sales transactions. Duffy estimates "average" Iowa land slipping about 15% from its peak, although he sees most land values running "sideways."
Past profits and bumper yields may be propping up some land sales now, but Duffy expects negative farmer cash flows will eventually cause more erosion in land prices over the next several years. Some lenders at the ABA conference predict a backlog of post-harvest auctions as some distressed borrowers will need to raise cash before next spring.
Still Duffy remains optimistic about farmland's investment value long term. Between 1950 and 2015, Iowa farmland has averaged 11.2% annual returns including both net cash rents and capital gains, he says. Over that 65-year period, it showed 52 years of positive returns. That's still better than the S&P 500 gains (with dividends) over history, he says.
Timing counts, however. "If you invested in farmland the 1970s and early 1980s, you would have been better off in stocks than in farmland," Duffy says. "Any other time, except the past couple of years, you'd have been better off investing in farmland."
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