Tag Archives: commodity
Understanding Farmland Values And The Long-Term Outlook
Sep 30 2013, 08:38 The last decade for agriculture has been the most exciting in many generations. Rising commodity prices and strong domestic and global demand has driven U.S. row crop farmland and other agricultural assets to record highs. Farming used to be a sleepy business that now is frequently on the front page of the New York Times and The Wall Street Journal. Over the last decade, U.S. farmland values have increased 116%, from $1,340 per acre in 2004 to $2,900 per acre in 2013, according to the U.S. Department of Agriculture. The Midwest Corn Belt, the primary farming region of the U.S., has been the leading beneficiary of the agriculture boom, with farmland values increasing over 200% in Illinois and Iowa. The global demand for agriculture has not only created wealth in the U.S., but across the globe from South America, to Eastern Europe, and Asia-Pacific. Jim Rogers said, “the farmers are going to be driving the Lamborghinis,” and this is coming true. In Illinois, the average farmer income was over $250,000 in 2012, up substantially from $66,000 in 2005. Higher commodity prices, increased production, and expense management, have led to the record farm income. Farmers have reinvested their profits back into their operations, increasing the size and scale of their farming operations and driving up farmland values. Farmland values per acre in Illinois and Iowa as of 2013 are now $7,800 and $8,400 per acre, respectively. Yes, farmland has sold for $15,000 per acre and even over $20,000 per acre, but U.S. farmland is a $2.5 trillion asset class and a few million dollar sales are not representative of the overall asset class. U.S. farmland has been an attractive investment for not only farmers, but investors as well. The consistent income, diversification, lack of correlation to other asset classes, and inflation hedge of farmland has been an attractive investment for individuals and institutions. Despite the recent enthusiasm for agriculture, we believe farmland values are fairly valued based on current market fundamentals and have substantial upside. Farmland values, like all assets, are a function of their future cash flows. Commodity prices are just one variable in the equation and production and expenses are keys to analyzing profitability. The average high quality farm in Iowa generates $950 per acre in revenues. We estimate the average input costs for a high quality Iowa farm to be $425 per acre and average cash rents to be $425, leaving a profit for farmers of $100 per acre, which is what most farmers use as their annual profit target per acre. Over the last 40 years, U.S. farmland has sold at an average capitalization rate of 5.0%. Using this historical multiple, with the average cash rent for a high quality Iowa farm of $425 per acre, generates an average value of Iowa farmland at $8,500 per acre, which is $100 more per acre than Iowa farmland is currently valued at. The last ten years have been the “Decade of the Farmer,” but this is just the beginning and we estimate we are in the second-to-third inning of a long-term bull market. We have highlighted a few data points that are important in driving farmland’s returns over the next decade. Rising Global Demand – The global demand story will continue to strain the world’s food supply. The global population is expected to grow from 7.0 billion people to 9.0 billion people by 2050. Over this same time period, food production will need to double to meet the needs of a higher protein diet. Land Scarcity – There are approximately 3.5 billion acres of arable land in the world and the potential for adding a mere 5% over the next few decades. Soil erosion and population growth are also depleting arable land by the minute. Over two acres are disappearing per minute according to the American Farmland Trust. Improving Technology – Precision technology and sustainable farming techniques will allow farmers to increase profitability over the next decade. Efficient use of fertilizer has already lowered costs to 15% of revenues, from 20% a decade ago. Drought and cold tolerance traits will allow farmers to have more stable yields. New technology will have a substantial affect on margins. Expansion of the Corn Belt – Planted corn acreage has grown 17% over the last decade as high commodity prices and improving technology has allowed farmers to plant corn farther north and west. Expanding infrastructure is also changing the direction of grain. Historically grain has been sent to the Mississippi River and the east, but rising demand in Asia has more grain being sent to the west. Multiple Expansion – Despite the rising interest in agricultural assets and low interest rates, farmland values have not seen an expansion in multiples. Over the last 40 years, farmland has been valued at cap rates of 5.0% and farmland still averages 5.0% cap rates in 2013. Conservative Balance Sheets – Farmer balance sheets are the most conservative in over 40 years according to the USDA. In Iowa, 78% of farmland has no debt against it, up from 75% in 2007. Investors Yet to Participate – In Illinois and Iowa in 2012, 85% and 82% of farmland was bought by local individuals, respectively. Investors’ have yet to have a meaningful impact or participation in the asset class. There is less than 1% of farmland currently in institutional hands. Aging Farmer – As of 2007, the age of the average U.S. farmer was 57.1. Over the next decade there will be a substantial change in who is sitting on the tractor as today’s farmers enter retirement. Typically the average parcel changes ownership once every 75 years. We see this generational change as one of the best opportunities to acquire farmland due to the unusually high volume of land potentially changing hands. Over the next decade, agriculture will have a few bumps in the road. Despite the strong demand story, we have highlighted some risks that may be hurdles in the short-term. Rising Interest Rates – Interest rates can’t stay low forever and we have already seen a substantial rise in 2013. A considerable rise in interest rates may prohibit growth in agriculture and farmers access to capital. Washington – Indecision in Washington and to-be-determined Farm Bill has left farmers uneasy about what support the government will provide in the short-term. Macro Economic Uncertainty – The end of easy monetary policy and potential slowdowns in emerging markets may slow the development of the global demand story. Identifying Assets – Rising agricultural asset values is making it harder to find undervalued assets. Ten years ago you would have made money by purchasing anything, now it takes hard work and deep analysis to identify the right assets that will outperform over the next decade. Understanding Farmland – All farmland is not created equal and two properties across the street from each other can have completely different production and economics. Identifying high quality assets that will benefit from the global demand story is key to an allocation in agriculture. When analyzing an investment in agriculture, it is important to look to the future. Farming has changed drastically over the last decade and will continue to develop over the next decade. Today’s progressive American farmer doesn’t merely work the land: he is also salesman, manager, accountant, buyer, marketer, scientist, agronomist, mechanic, and computer expert. Over the next decade, farmers will continue to consolidate and produce larger amounts of acreage, lowering their fixed costs and overhead. Precision farming and lower fertilizer use will increase margins and drive profitability. Farmland is a long-term investment and the focus should not be on commodity prices and yield estimates over the next twelve months, but over the next ten, twenty, thirty years. Farmland is the one variable in the farming equation that cannot be replaced and with sustainable farming methods, an investment in farmland will last longer than we can even imagine. Continue reading
Rabobank Report Finds U.S. Land Values Will Level
By Agri-Pulse staff ST. LOUIS, Sept. 19, 2013 -The era of extremely low interest rates and extraordinarily high commodity prices is drawing to a close, according to a new report from the Rabobank Food & Agribusiness (FAR) Research and Advisory group. As this trend nears an end, the prices of U.S. land values will level. “We’ll likely see lower commodity prices this year, but they aren’t going to be low enough long enough to substantially impact land values over the coming year or so,” says report author and Rabobank Food & Agribusiness Research and Advisory (FAR) senior analyst, Sterling Liddell. “In the short term, strong farmer balance sheets and high rental rates will support current levels. However decreasing commodity prices will keep the values from accelerating as rapidly as they have been.” The report, “Land Values Peaking Out-But Not Down,” finds in the medium term, the single greatest risk to U.S. agricultural land values is looming higher interest rates. Interest rates have been increasing through the first half of 2013, but based on the current Federal Reserve policy, a significant increase isn’t expected until 2014 or 2015. “We are entering an era where planning how you’re going to pay for your land is likely to become as important as planning for marketing your crop,” notes Liddell. The report forecast finds a decline in land values in the central U.S. of 15 to 20 percent over the next three years. In the Western and Southeast U.S., the decline will be less marked than in the Midwest. Corn was the leader in the commodity price boom, so as land values decrease in the Midwest, there is likely to be a general decrease across the Central U.S. as far south as Louisiana, the report explains. Rabobank also notes that while an increase in interest rates will have a similar impact on agricultural land values throughout the country, the amount of change will depend on the type of crop production and proximity to urban areas. Continue reading
Despite Drop in Commodity Prices, Farmland Values Rise
By PAUL SULLIVAN Published: August 16, 2013 DAN LINDSTROM remembers looking at a piece of Nebraska farmland six or seven years ago that cost $3,300 an acre. Raised on a farm, he ran the numbers with his brother who is farming the family land and concluded that it was too expensive. He figured that with a 2 to 3 percent return, it made more sense to put the money into a dividend-paying stock and have his brother lease additional land. A few weeks ago, Mr. Lindstrom said similar land sold for nearly $11,000 an acre. This is a common story across the farm belt. In Indiana, William C. Ade, who made a fortune in oil and gas exploration in Asia, said he stopped adding to his 1,000 acres when the price passed $5,000 an acre. “Right now it’s at auction as high as $12,000 an acre,” he said of land to grow corn and soybeans in northwest Indiana. “A poor plot of land went for $8,000.” Mr. Lindstrom, who is a financial adviser at UBS Wealth Management in Omaha, and Mr. Ade, a member of the investment club Tiger 21, are among investors who say they believe farmland could be headed for a serious drop in values, if not a full-on crash. Of course, many of them have been thinking that for years. The traditional view of farmland, from the farmer to the agricultural economist to the investment adviser, is, as Mr. Ade put it, “an inflation-proof bond.” (“No one is going to steal it,” he said. “No one is going to default on it. If inflation goes up, it will still be there.”) After the financial collapse of 2008, most forms of real estate were shunned. But not farmland. Prices shot up, driven by rising commodity prices from global demand, low interest rates in the United States and high auction prices begetting higher prices. Now commodity prices have fallen. Corn has gone to about $4.60 a bushel this week from over $8 a bushel last year. Soybeans have fallen to about $12.60 a bushel from over $17. Yet the value of farmland for row crops has continued to rise. “We’re kind of at an inflection point,” said Brent Gloy, a professor of agricultural economics at Purdue University. “We’ve had five years of spectacular profitability that was somewhat unanticipated. The U.S.D.A. was forecasting much lower than this, so it surprised people.” Yet there are still reasons to think that there will be buyers for land who will hold on to it for decades to come. A report released by U.S. Trust highlighted the graying of America’s farmers and their need to sell or lease their land as they age. “Can land go up and down?” asked John Taylor, national farm and ranch executive for U.S. Trust, which manages 900 farms for investors. “Sure. But I’ve never seen land go to zero. And with world demand, there is no vacancy factor on good U.S. farmland.” All of this raises the issue of whether it is time to sell. Brian C. Duke, vice president for Northern Trust, said that even with the run-up in prices for commodities, the annual return of farmland remains about 3 percent. Since 2000, the value of land in Illinois, for example, has increased 207 percent. For an investment comparison, The Dow Jones industrial average went up 42 percent in that period. Triple-digit appreciation has a way of luring new investors. More experienced investors said that appreciation isn’t the goal: to realize it you have to sell the land. “The capital gain is nice, ” said Albert Kirchner, who is known as Bud and owned a manufacturing company. “We don’t look at the capital gain. We look at it from a productivity standpoint.” Mr. Kirchner owns 6,000 acres of corn and soybean land in Illinois, an 8,000-acre cattle ranch in Montana and 1,200 acres of timberland in Florida. But his benchmark since he started investing in land after World War II has remained a 4 percent annual return. At that number and using Agriculture Department estimates that the average farmland value in Illinois is $7,800, Mr. Kirchner’s land would be worth $46.8 million, with an annual return of $1,872,000. But for the person who has bought land recently at auction, getting even 4 percent becomes more challenging. At $12,000 an acre, a 4 percent return is $480. Kevin Casner, who farms 2,400 acres in Carrollton, Mo., with his son Adam, said the rents in his area ranged from $150 to $450 an acre. (Those rents were negotiated before commodity prices started to fall, and will presumably drop.) But for the person who has bought land recently at auction, getting even 4 percent becomes more challenging. At $12,000 an acre, a 4 percent return is $480. Kevin Casner, who farms 2,400 acres in Carrollton, Mo., with his son Adam, said the rents in his area ranged from $150 to $450 an acre. (Those rents were negotiated before commodity prices started to fall, and will presumably drop.) A landlord can squeeze a farmer only so far on rent. Mr. Lindstrom said that an acre of his family farm was producing 175 bushels of corn, which equals a little more than $740 at $4.25 a bushel. But a farmer has some pretty hefty fixed costs. He said that, per acre, seed is $100, nitrogen is $100, dry fertilizer is $100, taxes are $50, insecticide is $30, chemicals are $50, and cash rent is $300 on average. That is $680 without factoring in the cost of equipment and labor. There is no room to increase the rent in this example by $180 more an acre. This balance between commodity prices and land values and rents can change. It is why all land investors need to have a long enough time frame. “If you’re wanting to park money for five years, farmland is really not what you should be investing in,” Mr. Duke said. “You need to have that longer-term approach.” Many farmers and investors fear the past decade could be too much of a good thing. “In real terms the gain we’ve seen in farmland values over the last 10 years are greater than those we saw in the 1970s,” said Professor Gloy of Purdue. In the early 1980s, farmland prices crashed when interest rates went up and farmers could not continue to borrow to finance their operations. The two things that could set off a decline are a further drop in commodity prices and higher interest rates. Matt Ward, one of the owners of Premier Grain Farms in Walker, Iowa, said that a drop of $2 a bushel in the price of corn translated to a loss of about $400 an acre. If all 15,000 acres he farms were planted evenly, that would translate into $6 million less in revenue than the land produced last year. Investors who have sharecropping agreements that designate a split in the harvest between farmer and owner will see their return reduced immediately. Those who have cash leases are likely to have to negotiate lower rents when the lease is renewed. Another option for an investor has been a variable cash lease. The owner would accept a lower cash rent up front and negotiate an additional payment if the price of the commodity or the yield was higher. There is now less chance of upside potential. As for interest rates, the fear is that they will rise and the value of land will fall. Mr. Lindstrom, the farm owner who works for UBS, said there was no way to finance land at today’s rates of 5 percent and make money. Cash buyers, he said, are at risk of losing their principal. “Could the land go from $10,000 to $15,000 an acre?” he said. “Sure, but not today and not with corn at $4.25. I’d be surprised if we don’t go from $10,000 to $8,000 or $7,000. Land has tripled in the last five to six years.” Still, this was the man who passed on buying land at $3,300 an acre because he thought it was overpriced. “We just tried to buy more ground and were willing to go to $7,500 an acre,” Mr. Lindstrom said. “It went for $10,500. My instincts tell me we’ll buy that ground, and we’ll buy it cheaper.” Continue reading
