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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
China Just Bought 5% Of Ukraine
By Lily Kuo @ lilkuo September 23, 2013 China likes the look of this red star. Reuters/Alessandro Bianchi China has inked a deal to farm three million hectares (paywall), or about 11, 583 square miles of Ukrainian land over the span of half a century—which means the eastern European country will give up about 5% of its total land, or 9% of its arable farmland to feed China’s burgeoning population. Under the deal between China’s Xinjiang Production and Construction Corps, or XPCC, and KSG Agro, an Ukrainian agricultural company, crops and pigs raised in the eastern region of Dnipropetrovsk will be sold at preferential rates to two Chinese state-owned grain firms. The project will launch with 100,000 hectares and eventually expand to three million. Here’s some context on what that looks like: The deal comes after Ukraine lifted a law barring foreigners from buying Ukrainian land last year. As part of the deal, China’s Export-Import bank has given Ukraine a $3 billion loan for agricultural development. In exchange for its produce, Ukraine will receive seeds, equipment, a fertilizer plant (Ukraine imports about $1 billion worth of fertilizer every year), and a plant to produce a crop protection agent. XPCC also says it will help build a highway in Ukraine’s Autonomous Republic of Crimea as well as bridge across the Strait of Kerch, a transport and industrial center for the country. Critics say the move exemplifies a slew of global land deals that smack of colonialism and resource extraction by richer countries in poorer ones. Today, such deals are increasingly motivated by governments seeking food security for their citizens, rather than profit-mongering by private companies. Saudi Arabia, South Korea, the United Arab Emirates, Britain, the US and other countries have been buying up foreign farmland, especially after the global food price spike of 2007 to 2008 that spurred global riots. According to a report last year by the nonprofit Grain, the main target of these purchases has been Africa but also Eastern Europe, Latin America and Asia. Between 0.7% and 1.75% of the world’s farmland is being transferred from locals to foreign investors, another study in January found. Given its dwindling available farmland and expanding population, China has been among the most aggressive. The country eats about one-fifth of the world’s food supplies, but is home to just 9% of the world’s farmland, thanks to rapid industrialization and urbanization of the formerly agrarian nation. Its deal with Ukraine is its biggest farmland investment yet. Since 2007, China has bought farmland (pdf) in South America, Southeast Asia and Africa. Some analysts fear the Ukraine-China pair up paves the way for an eventual Chinese takeover of all of Ukraine’s farmable land. Similar fears about local food security led the government of the Philippines to block a China investment deal; Mozambique has resisted the arrival of Chinese farmers who would have displaced locals. Others argue the project gives Ukraine the opportunity to boost food exports. Since the breakup of the Soviet Union, the country has been slow to fully privatize and develop its agricultural industry. Continue reading
Analysis: Despite Talk Of Farm Bubble, Farmer Mac Woos Investors
By David Randall NEW YORK | Mon Sep 23, 2013 (Reuters) – Farmer Mac – the farm loan equivalent of its cousins Freddie Mac and Fannie Mae – owes its existence to the last time a U.S. farm bubble burst. Now, the company is trying to convince investors it would survive another one. The market isn’t giving the company a vote of confidence yet. Just five years ago, Farmer Mac had to be rescued by its creditors after its large positions in Lehman Brothers and Fannie Mae went sour. Now, the revived company must prove to skeptical investors that it can withstand a sharp decline in the price of farmland that analysts expect to come in the next year. That open question – and the inability of Congress to pass an updated five-year farm bill, which provides crop insurance and other subsidies that farmers rely on – has been weighing on the company’s stock price. Shares of Federal Agricultural Mortgage Co. ( AGM.N ) – a government-sponsored enterprise that functions as a secondary market for farm, rural utility and rural development loans – are up approximately 6 percent for the year and 35 percent over the last 12 months. This year has seen a widespread market rally that has pushed the benchmark Standard and Poor’s 500 index up more than 20 percent. After collapsing to around $3 in late 2008, the stock price has since recovered to pre-crisis levels of around $34. Still, the stock trades at a price to earnings ratio of 5.5, close to half the valuation of small lenders like PennyMac Financial Services ( PFSI.N ) and of its own five-year average P/E of 10.1, according to Thomson Reuters data. The company has been actively courting small-cap fund managers, institutions and endowments by pitching itself as a conservative way to play the booming U.S. farm sector. In February, for instance, the company presented at the Bank of America/Merrill Lynch Global Agriculture Conference in Miami, and in April it gave a presentation to the California Municipal Treasurers Association. In all, it has made seven presentations to potential investors in New York, Baltimore, San Francisco and other locations this year. At all the events, chief executive Timothy Buzby argued that a decline in farm prices would not affect his company as much as the market expects. Farmers can always sell a few hundred acres of a larger farm or their excess equipment before defaulting, he said. “We only make real estate loans, not operation loans. If there’s a bursting of a bubble, the last lender to get hurt is the one who has the loan on the farm,” he said. He points to the company’s low 0.01 percent default rate and the fact that the firm “lost zero” during last year’s drought – the most extensive in at least 25 years – as evidence of the resilience of the sector. RUN-UP IN PRICES The widespread concerns that farmland is a bubble ready to pop comes from an unprecedented run-up in prices. Between 2003 and 2013, the average acre of farmland in the U.S. jumped 213 percent in non-inflation adjusted dollars, according to research by Brent Gloy, an agricultural economist at Purdue University, an average annual increase of 12 percent. By comparison, prices rose 127 percent in real terms between 1971 and 1981, a rally that ended in the late 1980s farm crisis when land prices tumbled 40 percent. That steep decline brought down several community banks and led Congress to create Farmer Mac. “If prices don’t start to slow down soon, that would be a major red flag,” said Gloy. Farmer Mac has responded by tightening its lending standards and the portfolio’s loan-to-value ratio has fallen to 60 percent from 70 percent, Buzby said. That has helped the 90-day delinquencies rate in its farm and ranch portfolio fall to 0.69 percent of loans in the second quarter of 2013, compared with a 1.30 percent delinquency rate in the same quarter of 2010. Freddie Mac , by comparison, reported that 2.79 percent of its loans were seriously delinquent at the end of 2012. Over the same time, Farmer Mac’s core capital rose to $564 million from $461 million. The company has also tightened its own standards for its liquidity portfolio, said Buzby, who became chief executive of the company in 2012. The prior management team was using the portfolio to boost earnings , he said. When its large position in Lehman tanked, the company was forced to sell $65 million in preferred shares to its lenders as part of a rescue plan. Most of the portfolio is now invested in low-yielding U.S. Treasuries, Buzby said, meaning that the company is losing money on its capital after inflation. Like other government-sponsored enterprises, the company has the implicit backing of the U.S. government, but does not offer the same level of security as a Treasury bond. To be sure, the company remains highly leveraged, like other government-sponsored enterprises. The company has a leverage rate of approximately 25 to 1. While that has fallen from a peak of 45 to 1 before the 2008 crisis, it remains higher than regional banks , which typically have leverage rates of 12 to 1. “When you talk about what you could be concerned about as an investor in this company, that would certainly figure into the analysis,” said one hedge fund manager whose fund owns shares of Farmer Mac and who did not want to be quoted by name. VALUE PLAY Some value investors who own the stock say that the company has stronger fundamentals than the market is giving it credit for. “If you look at the leverage within the farm system, it’s not nearly as high (as in residential mortgages) and it isn’t going out of whack like the residential space was,” said Howard Lu, a portfolio manager with First Wilshire, a Pasadena, California-based money management firm with $650 million in assets under management which owns Farmer Mac stock. The Kansas City Fed estimates that the debt to asset ratio in the farm sector is currently around 10 percent, well below the 25 percent mark associated with the collapse of the 1980s. By comparison, debt to asset ratios topped 25 percent in the residential mortgage sector leading up to the 2008 financial crisis. Lu said that the company is still “significantly” undervalued because of its earnings growth. Farmer Mac reported core earnings of $1.48 per share in its most recent quarter, a 27.9 percent gain from the same period last year. The company is little followed by Wall Street, in part because its market cap is so small that large-asset funds can’t invest much more than $20 million in the company without becoming a significant holder in the shares and distorting prices. As a result, its shareholders tend to be small mutual funds and hedge funds. The one analyst polled by Reuters who covers the company, Evan Hutto at Compass Point, rates it a buy, with a target price of $42, a roughly 25 percent increase from its current price of approximately $34. New York-based Sidoti & Company initiated coverage Wednesday with a price target of $44. Hutto looks for positive price moves after Congress passes a farm bill and when concerns abate that Farmer Mac will be hurt by falling farm prices. Rising interest rates could also push Farmer Mac’s loan volumes higher. Unlike Freddie Mac and Fannie Mae, Farmer Mac has largely been exempt from Republican bills that would unwind government-sponsored enterprises. “This is a company that’s had tremendous growth but has been falling under the radar,” Hutto said. “Now they need to prove that they’re for real.” (Reporting by David Randall; Editing by Claudia Parsons) Continue reading
