From California nut groves to corn and soybean fields in Nebraska and Iowa, farmland is attracting intense interest and commanding record prices as farmers expand operations and investors look for safe and solid places for their money.
The frenzied activity, interest from nonfarm buyers and accelerating prices are reminiscent of behavior that contributed to the 1980s farm crisis. But experts say critical differences exist today, most significantly the fact that many buyers pay cash and lenders require more money upfront from buyers.
“I see a lot of similarities between today and the 1970s,” said Jason Henderson, an economist and head of the Omaha branch of the Federal Reserve Bank of Kansas City, Mo. “Negative interest rates, a huge export market, rising deficits on the federal level. The one difference is that farmers aren't buying assets with as much debt as the 1970s.
“There's a lot more equity in the farm sector.”
Lenders and farmers learned from the farm crisis, when debt was high and built on the belief that land prices would continue rising. The people involved took steps to ensure they wouldn't get caught in a credit squeeze again, Henderson said, recalling one banker's comment at a conference a few years ago.
“A lender in the audience raised his hand and said to all the young guys, ‘Remember the lesson of the '80s: Too much debt in the face of falling land values is a recipe for bankruptcy. Manage your debt wisely,' ” Henderson said.
No 110 percent financing or interest-only loans here — two examples of the “exotic” mortgages that pumped up the recent housing bubble, which then burst.
“Seventy-five percent of Iowa's land has no debt against it. It's in strong hands,” said Troy Louwagie, chairman of the Farmland Value Survey, which is published by the Realtors Land Institute.
That lessens the potential impact of any future correction, from lower commodity prices, for example, he said.
Strong prices for grain are the primary driver of farmland sales, along with uncertainty about stocks, bonds and other investments. Low returns for government-insured products such as certificates of deposit also are a factor, said Marc Hock, regional manager for Pinnacle Bank, the largest ag lender in Nebraska.
“Whenever corn is pushed into the $4.25-to-$4.75 range, it doesn't take long to get a return on your investment,” he said.
Also, the amount of farmable land is declining, while the world's population is expected to go from 6.9 billion today to more than 9 billion by 2050. An economist for equipment maker Deere & Co. said in Omaha last summer that the world produced 7 billion tons of food in 2005 but will need to produce 10 billion to 11 billion tons by 2030.
Examples of some recent per-acre cropland sales:
Ÿ $8,100 near Shelby, Neb.
Ÿ $8,525 in York County, Neb.
Ÿ $7,875 in Harden County, Iowa.
According to the Iowa Farmland Values Survey, cropland prices increased an average of 8.5 percent from September 2009 to September 2010, from $5,314 an acre for high-quality ground to $5,765 an acre.
The comparative figure for Nebraska ($1,503 per acre as of June 2010, up 5 percent from the previous year) is misleading because of the state's diversity — from rangeland in the west, valued at a few hundred dollars an acre; to irrigated cropland, approaching $5,000 in some areas; to dryland cropland, about $4,000.
Irrigated farmland in eastern Nebraska, perhaps the most comparable to Iowa, had an average value of $4,890, according to the latest survey.
“We're much more heterogeneous,” said Bruce Johnson, an agricultural economics professor at the University of Nebraska-Lincoln and author of the Farm Real Estate Market survey.
“We're in such a transitional area of the country,” he said, from less than 900 feet above sea level in Richardson County in the southeast to more than 5,400 feet in Kimball County in the southwest.
Another reason for the increased value in farmland is the economic principle of supply and demand.
Johnson said the annual land turnover rate in Nebraska, historically low anyway, is down to an average of about 1.55 percent over the last few years.
“In the last 10 years or so, land was in good hands and stayed in good hands, apart from estate settlements and divorce situations.”
Some real estate experts expected more land to arrive on the market this year, as owners tried to take advantage of low capital gains tax rates. But that didn't happen.
“It was a case where people said, ‘OK, we can sell now and avoid some taxes, but then what do we do with it (the money)?'” Johnson said.
Individual investors or investment groups from outside Nebraska and Iowa make up a small percentage of buyers, but most are local, and many are farmers seeking to expand, said Lee Vermeer, a vice president at Farmers National Co., a national farm management, appraisal and real estate firm based in Omaha.
“I'm guessing 85 percent to 90 percent” of buyers are farmers, he said. Previously, farmers made up 70 percent to 80 percent of the buyers, Vermeer said.
Hock at Pinnacle Bank said many of the “outside investors” could be adult children of farmers who work and live elsewhere but remain interested in farming and want land in their portfolios.
Mark Hesser, president of Pinnacle Bank, said there are more cash buyers today than in the last 10 or 15 years. “Grain producers have made money for three to five years, and that's given them good cash positions.”
And buyers who seek financing are likely to get it, unlike some small-business owners who have bemoaned the scarcity of credit since the subprime mortgage debacle, big bank failures and the recession.
Why do farm borrowers fare better?
“No. 1, there's a tangible asset,” Hock said. “Land is always worth something.”
Farms also produce a product for which there is a solid market, he said, which isn't necessarily the case for small businesses. Half of all small businesses do not survive past five years, according to 2008 data from SCORE, the nonprofit counseling association affiliated with the Small Business Administration.
Still, despite the apparently solid business decisions and rosy environment for agriculture, Henderson, as an economist, sees a more balanced picture.
“One of the things we've been looking at ... is values outpacing cash rents,” he said.
The value of land and the amount someone pays to rent and farm it — a figure that varies depending on location, land quality and other factors — should move ahead in a similar pattern, Henderson said.
The equivalent in the housing sector is that personal or household incomes should be in line with the value of a person's home, something that became unbalanced and contributed to the housing collapse.
“I don't see corn prices returning to $2 a bushel, but the concern I have is that this run-up was due to a supply shock — the drought in Russia — and a supply shock doesn't last long. Next year you get a new crop,” Henderson said.
Too many variables exist to predict the price of corn in the long term: weather; federal ethanol policies; global population growth and demand; water supplies.
But that's why landowners' equity vs. debt is so important. If the value of the land declines, the impact on the lender is less if the landowner has plenty of equity and a smaller loan.
Again, that's a major difference between 2010 and the early 1980s, Henderson said.
“By 1982, farmers basically were struggling to service their debt. When farmers' incomes weren't enough to pay their debt, it was the beginning of the farmland bust.”
Hesser said he sees the potential for an “adjustment” in land values if commodity prices decline. But Pinnacle Bank has accounted for that possibility, he said.
“One conscious decision we made is to put a cap on the amount we'll loan. Typically, we'd require 20 percent to 30 percent equity,” he said.
Johnson, the UNL professor, said farmland values are vulnerable to commodity prices and other factors, but the bottom line is that it's a good asset.
“In inflationary times, it holds its value. In deflationary times, a lot of stuff will sell at a bigger discount than good, productive land.”
Contact the writer:
444-1080, pat.waters@owh.com
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