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Farmland Values Are Cooling After Years Of Explosive Growth
http://www.stltoday.com/search/?l=50&sd=desc&s=start_time&f=html&byline=By%20Georgina%20Gustin%0Dggustin%40post-dispatch.com%0D314-340-8195 The boom in farmland values, which triggered frenzied auctions and record sale prices, is over. That’s the bad news for Midwestern farmers. The good news is there’s no bust on the horizon, economists believe. Midwestern farmland values have soared in the past five years, along with grain prices, climbing as much as 20 percent two years in a row — something that’s never happened before. In some areas land prices rose 25 percent. One Iowa parcel sold for a record $20,000 an acre, and in Illinois, prices were reaching the mid-teens. Missouri farmland was fetching up to $5,000 an acre, up from $500 or $600 a quarter-century ago. The rise in values drew not just farmers, but outside investors who began to see American farmland as a safer investment than the stock market. But now, economists believe, the boom is cooling off. “We’re talking about the first slowing in the rate of increase,” said Chris Hurt, an agricultural economist with Purdue University. “There’s a leveling off in farmland values, and with anything that’s had a strong upward slope, you’d expect this. The primary driving forces of this period of rapid increase are beginning to come to a close.” Government mandates for ethanol and demand for grain from developing countries have been the major drivers behind record grain prices in recent year, which have stoked land prices. But now these and other factors are waning. Mandates under the Renewable Fuel Standard call for 13.8 billion gallons of corn-based ethanol this year. But because most cars only take a 10 percent ethanol blend, ethanol is hitting what’s known as the “blend wall” — the limit at which ethanol can be added to the gasoline supply. “We use about 133 billion gallons of gasoline,” Hurt said. “Ten percent of that is 13.3 billion, not 13.8 billion, so we’re running into a policy dilemma. We just don’t need a lot more corn.” At the same time, economists say, demand from developing countries is tapering off. In China, where a growing middle class is newly flush with cash for grain-intensive proteins, incomes are declining slightly — and that has meant a slight slowdown in demand for American soybeans, Hurt said. “Their incomes aren’t growing by 10 percent; they’re growing by 7 percent,” Hurt said. “There’s still very rapid growth, but it’s slowing.” China, and other countries, are also buying grain from countries where farmers have expanded grain acres in response to high grain prices. With drought and rain curtailing American harvests and driving up prices over the past three years, those farmers — particularly in South America — have been able to capitalize. “When prices of agricultural things get high, you see a supply response, and the response is really showing up now,” Hurt said. “We’ve seen multiple years of this explosion to the upside, particularly with short production. If we can get back to normal supplies in the U.S., we’re going to moderate these basic farm prices — and those prices are what drive land values.” But most Midwestern farmers should be in fine financial shape. During the last agricultural bust, in the early 1980s, farmers were heavily in debt and many lost farms. But since then, lenders have been especially cautious, lending only a small percentage of a sale price. Besides, farmers have been making record incomes, and that means they’ve been paying with cash — if they’ve been buying land at all. “There’s a lot of talk of a possible bubble in land values,” said Ron Plain, an agricultural economist with the University of Missouri. “But the good news is we haven’t sold a lot of land, so not a lot has been purchased at these high prices. A lot of farmers have pretty good cash flow, so the land that’s been sold hasn’t been sold with a lot of debt.” A stronger stock market, Plain said, has sent investors back to Wall Street. “I would guess we’re not going to see a lot of investors buying farmland.” So, if farmers get what they want in the next couple of years — good weather and good harvests — farmland values could come down, Plain said. But in the meantime, they’re just growing at a relatively modest 2 or 3 percent. “We’ve had weather, huge demand growth, changes around the world. What’s normal these days? We’ve lost our base of understanding,” Hurt said. “We’re going to learn what’s normal in agriculture in the next few years.” Continue reading
Invest In Farmland
By Anne Perks FARMLAND has out-performed both equities and commodities in terms of value growth and levels of volatility over the past 17 years, with momentum continuing into the first quarter of 2013, according to Chesterton Humberts’ latest rural research report. Since 1995, average farmland values have risen by 9.2 per cent per annum, well above equities (4.1%) and gilts (7.4%), while returns were much less volatile (12.4%) when compared to oil (51%) and gold (14.7%). This makes it one of the best performing asset classes in terms of low risk and high returns after gold. Chesterton Humberts has recently set up an index to monitor growth in agricultural estate values. According to the company’s new Agricultural Estates Index, which tracks quarterly changes in the value of a standard basket of agricultural estate types (from bare land parcels up to fully-equipped residential estates) with grades 1, 2 and 3 land only, average estate values rose by 0.4% in Q1 2013 to stand at £10,581 per acre. The biggest uplift was seen in the larger transactions, which are mainly driven by investors seeking opportunities to achieve worthwhile economies of scale. Overall, however, farmers remain the main buyer group as they seek to expand their existing acreage, followed by UK investors and private purchasers, including overseas buyers taking advantage of the current weakness of sterling. Andrew Pearce, head of Chesterton Humberts’ rural agency, explains: “Despite the weather failing to improve during the first quarter of 2013, there is certainly a compelling long-term case for investing in farmland. The main advantages, which include scarcity value, rising food demand and tax advantages, are set to continue for the foreseeable future. Additionally, the changing global weather patterns are likely to exert upwards pressure on food commodity prices, while technology will create longer-term cost savings and efficiencies.” Nick Barnes, head of research, said: “The combination of low volatility with its potential to generate long-term capital growth and income allied to potential tax benefits has demonstrated that agricultural estates outperform other assets, including equities and commodities, and have thus attracted a wide range of prospective purchasers. “Provided the regulatory and tax environment stays relatively benign, it is likely to be only a matter of time before the institutional funds become more involved in the sector again.” Chesterton Humberts is now forecasting that agricultural estate values will grow at a rate of five per cent per annum over the next five years due to a combination of the longerterm positive fundamentals of the sector and the supply/demand imbalance. This figure may well be exceeded in some local markets, where the availability of larger estates will drive growth in values. FACTFILE * Farmland is second only to gold in terms of longterm risk and return. * Average per acre agricultural estate values rose 0.4 per cent to £10,581 an acre in Q1 2013. * Investors are increasingly attracted to the sector’s low volatility and high growth track record. * Agricultural estate values are forecast to grow five per cent per annum between 2013-2017. Continue reading
Housing Bubble II: But This Time It’s Different
MONDAY, MARCH 18, 2013 AT 6:00PM We have seen it for several years now: foreclosure sales—there were 5 million since the peak of the housing bubble—have become the hunting grounds for investors with two goals: hanging on to these homes until the Fed’s flood of money drives up their value; and defraying the expenses of ownership by renting them out. And funds have a third goal: collecting management fees. Thousands of smaller investors have piled into the game. And so have the giants. Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg , to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work. Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami. It had an impact. In the latest Case-Shiller report—a three-month moving average for October, November, and December—home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble . Las Vegas popped 12.9%, and Phoenix 23%. It’s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%. “We recognized that prices were moving faster than people expected,” explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, they’re still “finding opportunities to buy.” They might not be able to rent them out very quickly, but they’d rather not be “missing out on a few points in home price appreciation.” The race to buy is on. The next housing bubble is inflating. And that’s great. Money—which the Fed hands to its cronies at the frenetic pace of $85 billion a month—magically finds places to go and drives up values, and transactions take place, and paper gets shuffled around, and homes change hands as banks get out from under them, and fees and commissions change hands too. It inflates GDP, which is what everyone wants. And Chairman Bernanke can contort his arm slapping himself on the back. Trying to rent these places is another story. Housing is zero-sum: when you move into a new place, you move out of the old place at the same time. So it becomes available. And someone else goes through the same process. Only household formation solves the problem of vacant homes—but that takes years or decades. Best of all, these formerly foreclosed homes have now been pulled off the for-sale inventory list. Hence the “tight” inventory. And they’ve been transferred to the for-rent inventory list where they don’t bother anyone. Except the owners. Colony Capital, for example, with its 7,000 homes, has an occupancy rate of 53%. Suddenly, the market for single-family rental homes—unlike apartments, which cater to different people—has turned into an elbow-to-elbow affair. The pressure on rents is huge. Year-over-year, rents edged up only 0.5% in Atlanta and dropped 1.7% in Las Vegas. For Phoenix, Bloomberg cited Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency: median rent per square foot rose 3% year-over-year in February 2011, and 1.5% in February 2012. But in February 2013, it fell 3%. This tendency was confirmed by others. On the west side of Phoenix, where investors have concentrated their purchases of single-family homes, rents dropped by $100 a month last year—a stunning 10%!—according to James Breitenstein, CEO of Landsmith which has dumped most of its Phoenix properties. He is seeing similar pressures in Las Vegas and Atlanta. “There’s a whole bunch of rental supply that’s coming on that used to be sitting empty in bank portfolios,” he said. Timing couldn’t be worse. Occupancy rates of single-family rental homes are already low— 53% for Colony Capital. But investors are buying ever more properties and flood the rental market with them. Just when the stream of people who’ve gotten kicked out of their foreclosed homes is tapering off. With rising costs and declining revenues, the rental part of the business model collapses. As the Fed’s money is trying to find a place to go, prices may continue to rise. But with the economics to support these prices—namely rental revenues—giving way, the remaining reason to buy would be a singular hope : economically unsustainable price appreciation. The definition of a bubble. At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again. Dallas Fed President Richard Fisher often warned about the nefarious effects of this flood of money. But he was shuffled off to “an out-of-the-way ballroom” at the CPAC, where Republicans struggled with the future, and drew barely two dozen people; yet he had a pungent message. Read…. The Fed’s Token Voice Of Reason: Megabanks Undermine Americans’ Faith In Democracy Continue reading
