According to economists, lenders and appraisers who attended a Farm Foundation meeting this week, U.S. agriculture could avoid the long-feared collapse in farm real estate prices this commodity cycle. However, some cautioned that the values of used farm equipment may sink over the next year if profit margins don’t improve.
According to Bruce Sherrick, director of the TIAA-CREF Center for Farmland Research at the University of Illiniois, “Land values haven’t seen near the pullback that everyone predicted.” He went on to discuss that that moderation makes sense due to the fact that farmland investors focus on a long-term value perspective. Sherrick compared land investors’ expectations of future income to the climate, not the weather, implying that a dip in short-term commodity prices aren’t reflective of a 30 to 50-year history of appreciation.
Senior vice president and head of appraisals at Omaha-based Farmers National Company Randy Dickhut agreed with Sherrick. He described the market as balanced, and that based on his studies of recent sales in over two dozen states, that there is an equilibrium between buyers and sellers.
Aside from outliers, like North Dakota whose prices have dropped about 20% off peak, Dickhut estimates that prices in most areas have remained steady, citing a 40% decrease in the amount of farms for sale as the reason for the tight inventory and stable prices.
According to the latest Federal Reserve surveys, Mountain State irrigated farmland showed a 13% gain in the first quarter, with Corn Belt land only 4% off average compared with the previous year. Other farm managers reported that lower quality land has suffered more than higher-quality land.
Mike Jacobson, chairman and CEO of NebraskaLand Bank of North Platte, Nebraska, cites significant differences in land and credit markets as the reason he doesn’t foresee anything in the near future that could match the distress sales of 1980. In the early 80’s, investors often sat out when agriculture took a hit because they had safe alternatives compared to farmland. Jacobson contends states that with the market changes since then, there aren’t alternative investments for investors looking for a return.
He goes on to explain that, “Nobody goes through wholesale liquidation today like they did in the 1980’s.” A distressed operator is much less likely to sell all of his land wholesale; instead he might sell just a portion of his land for a little cash. He cites the reason for this as farmers possessing more equity in their land now compared with earlier cycles, and therefore they are reluctant to sell their land at wholesale prices.
Jacobson discussed how this reluctance and lack of distressed properties on the market is in part due to proactive policies like those of the Farm Credit System and other lenders. Starting in about 2008, these lenders put a cap on the amount of credit they would loan on farm mortgages. These lenders financed significantly less per acre than was common in the 1980s. Jacobson explained that “The underwriting has been much more responsible than in the 1980s. Why would anyone with that much equity in land want to give it up now?” He goes on to state that, if needed, a farmer would sell his equipment before his land.
In states where they are active, nonfarm investors such as public and private real estate investment trusts (REITs) increase the amount of potential buyers in the market. According to the USDA, these types of investors only own about 1% of the nation’s farms, but they account for 10% of production. Sherrick believes these numbers can be expected to grow aggressively in the case of a downturn in farm real estate.
Several agreed that decreasing farmland value isn’t the concern, but instead it’s farmland equipment. Jacobson believes that those at the highest risk are the younger generation of farmers who don’t have the net worth built up from farmland appreciation, and they rent the majority of their operation. He states that if they can’t renegotiate more satisfactory rents in the coming year, they will resort to selling their farm equipment. Jacobson goes on to explain that this could deal a significant blow to the equipment business, whereas in order to drop farmland values, there would have to be a much longer sustained decrease in farm incomes. He says, “The reckoning we see in 2017 won’t be for farmland, but for used equipment.”
Source: Marcia Zarley Taylor, DTN: The Progressive Farmer