Browse Tag: farmland

Is A Farmland Bubble Forming?

Free_High_resolution_nature_wallpaper_Farm_1010

The story so far: the Federal Reserve in Kansas City mid-2013 published that irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. Last year’s drought in Iowa last year notwithstanding, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska, says the Fed, have also doubled during the same period.

There’s a complicated set of factors joining together to drive up farmland prices. Drought, institutional buying, ethanol mandates from the federal government, rising food prices and population concerns are all having their say in a steadily rising price for irrigated cropland. Some are saying the trend is unsustainable and shows all the signs of a classic market bubble. Troublingly, different looks at the market come to similar conclusions about a coming price collapse even if there’s disagreement about cause.

Institutional Players

As Reuters reported recently, a report by The Oakland Institute documents a “global land rush of unprecedented scale” and estimates $10 billion in institutional dollars is chasing the fixed amount of US cropland.  Pension giant TIAA-CREF, Hancock Agricultural Investment Group and UBS Agrivest were singled out as key drivers of a surge in farmland prices.  This financialization of food-producing land is identified as “speculative” by the report.

Generational Turnover And Tight Credit For Small Farmers

Another trend feeding the charge toward institutionalized demand for land is the plight of the young farmer. A 2011 survey published by the National Young Farmers Coalition found that 78% of young farmers cited lack of capital as their biggest challenge.  Depending on off-farm income to make ends meet only further sweetens the deal to a young farmer when an institutional player comes calling to pad its asset holdings.

Biofuel Mandates

In 2005, Congress passed the Energy Policy Act of 2005, setting the stage for later mandates by the Environmental Protection Agency to compel an increase in the production of ethanol, the corn-based fuel. The EPA’s RFS and later RFS2 programs sought to almost quadruple ethanol production. The effect of government policy into land prices is highlighted by one analyst at Seeking Alpha when he points to a spike in land prices that occurred in the 2005 quarter the bill passed.

While that price move explanation seems valid, what’s less clear is any similar ongoing related effect of ethanol mandate on corn-producing land prices in the intervening nine years. As per usual, when it comes to explanations of prices from institutional sources, only some actors get attention. The Wall Street spin evident in the above-linked piece focuses only on Washington and ignores totally the fact or any possible effect of $10 billion Wall Street dollars wading into the market, as well as the plight of the farmer strapped for credit and capital.

Prices Stabilizing For Now

The Fed reports that land prices in late 2013 only gained 3%, but also touched on the farmer’s plight, indicating cash rents (and food exports) were in fact up:

Cash rents, another key indicator of farmland value, were also steady to higher as farmers negotiated contracts in the fourth quarter that will cover the 2014 season, according to the St. Louis Fed. Values were buoyed by a gain in farm incomes in the quarter, including crop insurance payments and much larger harvest supplies even at lower prices.

[…]

In recent years, both crop and farmland prices have set records as the boom in biofuels and food exports fueled demand. But the sharp drop in second-half 2013 grain prices ahead of the record corn harvest had bankers fretting that farmland prices could also plunge.

With land acting as security on most loans to farmers for equipment, and a persistent credit crunch facing farmers quarter after quarter, signs are piling up that the value of mortgaged food-producing land is headed for a slip. When, as WSJ reports, tractor company John Deere revises its farm equipment sales projections to 5% from the 10% thought a year ago, that’s only one of a set of signals that a land boom driven by Wall Street may be coming to a close.

Farmland Rental Rates Lagging Rising Land Values

Farmland in the USA. The round fields are due ...

The USDA’s semi-annual survey on the state of farm finances, called the Agricultural Resource and Management Survey (ARMS) is “the only national survey that annually produces observations on field-level farm practices, the economics of the farm operating the field, and the characteristics of farm operators and their households”.  This year’s ARMS look at the economics of farm operations is showing a race between rented and purchased land prices, both rising, but one lagging the other significantly.

Owning Vs. Renting Markets

Ownership means less in the land use picture than in other lease-driven sectors. Typically, rented farmland is worked according to the needs of the renter, not the landlord.  Leases are often informal. According to the most recent survey, 93 percent of producer/respondents say the landlords aren’t involved in the decisions about land use, crop or livestock selection.  That said, the booming market in farmland might suggest that capital is flowing to such deals from distant capital centers.

Not so, says the survey.  75% of landlords live in rural areas within the state where the farm is located.  About 17% of those are within the state, but in “urban” areas (rated as populations over 10,000).  Only 8% of farm landlords live out of the state, according to the USDA study.

The average US farm has approximately three rental agreements in place. These might include fixed or flexible cash rent, crop share and even free rental agreements. As the farm size rises, the number of rental agreements increases.

According to presenters at Farmland  Leases: Tales, Types and  Trends, a conference sponsored in November 2012 by the Chicago Federal Reserve, higher crop prices are forcing changes in rental agreements, requiring renters to make extra payments, often based on crop prices and yields. Even so, cash rental rates are lagging ownership prices in farmland.

Iowa Farmers Warn Of Land Price Bubble

Rental and ownership looking flush as it is, who’s on the bearish side?  Farmers.

Some producers see bad weather coming in ag land prices.  A statewide poll of Iowa farmers returned an alarmingly high percentage of farmers agreeing that farm land price levels are unsustainable.

A majority of the farmers responding to a statewide poll believe Iowa farmland is overvalued and prices are much higher than the land is worth.

Sixty-eight percent of the producers responding to the 2012 Iowa Farm and Rural Life Poll agreed that farmland values are too high and cannot be sustained at current levels. Forty-eight percent agreed that “the farmland market is in a bubble that will eventually burst and lead to major drops in values.”

Other farmers were more optimistic, with 41 percent believing that land values will continue to rise, but at a slower pace. More than 60 percent of the poll participants agreed that quality cropland is still a good investment.

Asked to rate the impact of a number of factors on recent farmland price escalation, 85 percent agreed or strongly agreed that high corn and soybean prices was the most influencial factor driving higher prices. Seventy-two percent believe competition between neighboring farmers who want to expand their land also is a major influence boosting land prices at auctions.

Two-thirds or 66 percent of farmers indicated that low returns on other types of investments was a strong or very strong influence. Seventy-one percent of survey respondents agreed that rising land prices have led to intensification of farming.

Somewhere between the bear and the bull lies the barn.  What will its future hold?  Is a kind of financialization of farmland underway where non-operator owners will ultimately make a killing but leave the operators in a lurch?  Or is the explosion in population and food demand a built-in support for land prices and rents?  Time will tell.

Farmland: (Some Of The Reasons It’s) The Hottest Commodity In The World

I‘ve not spent much time on a farm — I’m more the research library type.  So when I saw the title of the NAR REALTORS® Conference & Expo “Farmland: The Hottest Commodity In The World”, I expected and got a new experience: a detailed tour of the economic and social contours of the business of farmland.

Our session’s guide for this market rundown was Randall Hertz of Hertz Farm Management, Inc., an Iowa firm dedicated to managing farmland in the US and Brazil.  They have over 2,200 farms under management totaling over half a million acres.

The agricultural marketplace Randall portrayed had a bright future for land prices, to say the least.  “Farmland is income forever,” he began. Some of the reasons he planted*:

  • To support expected world population growth rates, farmers will need to produce more food in the next fifty years than in the last 10,000 years combined
  • Oil prices on the rise bode well for corn-based ethanol market demand and corn prices
  • Transaction volume rises coming on strong due to aging out: 42% of US farmers will retire within 5 years, and 44% of them have not indicated a successor
  • Near-zero Fed interest rates driving near zero incentives to save, resulting in broader investment incentive
  • China looms as a massive importer of food: has 20% of the world’s population but only 7% of the arable land.  Chinese population migration patterns are overwhelmingly favoring urban areas with workers, adding to net food import demand going forward.
  • In 2011, the world population hit 7 billion.  By 2050, it’s expected to see 9 billion.
  • The 2012 USDA Land Values Summary shows agricultural land values up in most states, with a downturn localized to the southeast
  • Price upsides (and downsides) come with market instability. New agricultural land market instability factors loom, such as an impending decision in the Supreme Court concerning inter-state water compacts, which are very old agreements ratified by Congress and signed by the President deciding water use between states.  A recent case pitting Oklahoma vs. Texas is expected to put the entire compact system on trial.

These and many other market factors took some time to get through, and it was a solid presentation, but something nagged at me. I was reminded of what it was during Q&A when an attendee asked for a comment about Monsanto’s policies concerning patented seed stock.

It was at that point I realized that at no time in the otherwise comprehensive presentation was any mention made of big agriculture – the Cargills and the ADMs and others whose contract farming operations make up a giant chunk of the market we were hearing about.  And while Randall’s slides contained plenty of complaints about government policies – environmental, fiscal and other –  I did notice a pair of pie charts delineating federal spending.  I looked at the charts several times and at no time did I find any mention of the multibillion-dollar agricultural subsidy budget, from which Mr. Hertz’s home state of Iowa benefited to the tune of $1.3 billion just last year.  Odd oversights for a Harvard-trained gentleman farmer, I thought.

 

* I promised myself to keep the farm jokes to a minimum yield.  Sorry.

 

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