January 29, 2009

 

The US agricultural real estate market may hit some bumpy terrain in 2009, after cruising to an unprecedented price plateau during 2008.

 

A January 14 Federal Reserve Bank report on local economic conditions noted that farm income expectations weakened in the largely rural 10th District, which includes all or part of Colorado, Kansas, Missouri, Nebraska, New Mexico, Oklahoma and Wyoming.

 

"With commodity prices well below summer highs, rents and prices for cropland eased, although they remained well above year-ago levels," said the bank's Kansas City branch. The Fed paper also said that local lenders reported a reduction in capital spending as a result.

 

A late-summer report published by the National Agricultural Statistics Service of the US Department of Agriculture - shortly after cash grain prices had reached record highs - said US ag land prices were also at similar record highs, averaging US$2,350 per acre. That was 8.8 percent above the previous peak set in 2007.

 

Premium farmland continues to yield premium prices in some Midwestern states, with buyers at one major central Illinois auction paying just over $24 million for 4,010 acres of farm ground just last week.

 

"That's about US$5,985 per acre," said the Illinois Farm Bureau. The price was at the far upper end of the US$4,800-to-US$6,000 per acre range most recently quoted for top cropland in a survey taken by the Illinois Society of Professional Farm Managers and Rural Appraisers.

 

University of Minnesota extension ag business management specialist David Bau also said last week that in Minnesota, "farmland values continue to rise, and are once again reaching all-time record levels." Sales are averaging US$3,702 an acre, Bau said.

 

Bau attributed the lofty level of land prices to the flight of investment capital from battered equity markets, extremely low interest rates and record-high cash-rental rates for prime cropland.

 

But he cautioned, "there are indications that land values have started to decline 10-15 percent in the second half of 2008, as the stock market and grain price fell considerably."

 

A similar story is heard from neighbouring states, where the latest official survey in Iowa pegged the value of one acre of farmland at an unprecedented US$4,468, ostensibly up 14.3 percent from 2007.

 

But Iowa State University extension agricultural economist Mike Duffy emphasized the ISU survey covered only the time period between November 2007 and November 2008.

 

"This is important to remember because there have been considerable changes in the situation in Iowa over the past few months," including a 40 percent to 45 percent drop in cash corn/soy prices, and a substantial increase in farm input costs, especially for fertilizers and seed, he said. "The uptrend [in farmland prices] is appearing to be wearing thin. The recent declines in the grain market appear to be having a direct impact on values."

 

Officials with the Omaha-based Farmers National Company - which manages farms covering 1.3 million acres in 20 states - say demand for land has softened considerably during the last three months, led by declines in Iowa.

 

Farmers National Sales Manager Sam Kain deals with farm managers/real estate agents throughout Iowa, northern Missouri, southern/western Minnesota and North Dakota. In a recent company newsletter Kain said that land values in his area rose about 15 percent through the middle of October, but have given back all of those gains since that time. Kain said that created "a steady market for 2008 overall."

 

Farmers National auctioneer Monty Meusch said watchwords "in the land market is 'quality and location'. The good farms located in areas where farmers and ranchers are still growing their operations are selling near the top and certainly well ahead of the market of just two or three years ago."

 

By contrast, he estimated that prices offered for lower-quality farms with poor drainage, poor water availability and/or a relatively low percentage of cropland versus pasture/timber ground have already fallen at least 10 percent from their 2008 highs.

 

"The demand for hunting/recreational properties is virtually nonexistent at the moment, due to the economy and the fact that discretionary dollars available for this type of purchase are reduced," he said.

 

Although cautious, Kain said farmers aren't highly leveraged today, as was the case in the early 1980s when plummeting land prices forced many into bankruptcy.

 

"So far, there has been little pressure on farmers due to finances, especially in light of back-to-back record [income] years," he said. "With no pressure for farmers to put land on the market, inventory of land for sale remains low."

 

Historically low interest rates facilitate ready financing of real estate purchases, said Kain, who said he believes farmland values, "will hold steady to possibly increasing slightly in 2009...dependent in part on how soon the financial markets straighten out and Wall Street bottoms out."