Tag Archives: javascript
Farmland Bubble? 10-Year Rise Raises Red Flags
By William L. Watts, MarketWatch An earlier version of this story incorrectly identified the location of a farm sale that took place in Grundy County, Iowa. The story has been corrected. NEW YORK (MarketWatch) — Farmland prices have been on a tear for over a decade, barely slowing as the rest of the country suffered a housing collapse, leading economists and investors to worry that a dangerous bubble is forming in the heartland. The average acre of Iowa farm real estate rose 20% in value to $8,400 in 2013, according to the U.S. Department of Agriculture. That’s up from $3,850 in 2009, and data show overall farmland prices have been on the rise for more than a decade. It’s a similar story across the Corn Belt and the Northern Plains. But it takes more than a string of big gains to blow a bubble. And while some farm real-estate professionals are wary, they argue that the evidence doesn’t justify bubble fears – at least not yet. “In general, if you ask, is farmland in a bubble, I’ll say, no,” said John Taylor, national farm and ranch executive for U.S. Trust, a private bank that is part of Bank of America Corp. “But if you ask, are some people paying bubble prices, I’ll say, yes.” There are strong fundamental reasons behind the run-up in farmland prices. First off, farm income has surged over the last decade as commodity prices boomed. Ultralow interest rates also help. But now, commodity prices are setting back and interest rates have started to move higher, albeit from very low levels. That’s why the next year or two will provide an important test. “This is the moment of truth, I think,” said Brent Gloy, an agricultural economics professor at Purdue University in West Lafayette, Ind. If prices continue to surge in the face of intensifying headwinds, it would then be a troubling sign that a bubble was building in farmland, he said. Up until recently, however, farmland values have risen in the midst of what could be termed a positive perfect storm, Gloy and others noted. The so-called commodity supercycle saw prices for corn, wheat and soybeans soar as China and other emerging markets sucked up an increasing share of commodities from around the globe. Demand for biofuels added to gains for corn. Meanwhile, interest rates fell sharply as the Federal Reserve cut official interest rates toward zero in response to the financial crisis. The Department of Agriculture has forecast 2013 national farm income to rise 6% to $121 billion, around $3 billion above the previous record set in 2011. Ultralow interest rates have affected farmland prices in more ways than one, noted Jim Farrell, president and chief executive of Omaha-based Farmers National Company, a farm-management and land sales firm. Low rates make it cheaper to finance land purchases, but they’ve also fueled a hunt for yield that’s helped boost demand for farmland. At the same time, worries that there will be nowhere to park the proceeds from a farm sale have helped limit the supply of farmland on the market, he noted. Mike Walsten, who tracks prices as editor of the Land Owner newsletter in Cedar Falls, Iowa, said that farmers are finding it “a little more difficult to get the prices they got six months ago.” He noted, however, that he and many others had anticipated a softening of the market last year, only for a drought to send crop prices soaring. Now, a softer market for farmland is most evident in Iowa and southeastern Minnesota, where the growing season has been especially difficult, Walsten said. There have been “no sales” at auctions where prices didn’t meet minimum bid expectations. Inflection point Still, there are outliers. A piece of “exceptionally prime” farmland in Grundy County, Iowa, brought in a record $17,600 an acre, Walsten said, while a recent sale in Lincoln County, South Dakota, saw an 80-acre parcel bring $12,450 an acre. And prices in the eastern half of the Corn Belt continue to show strength, with prices still on the rise in Illinois, while Indiana and Ohio have seen record highs. Farrell said he agrees that the farmland market is likely at an inflection point that bears watching. But like many observers, he notes there are significant differences between the current situation and the late 1970s, when a credit-fueled land-buying frenzy sowed the seeds of the subsequent decade’s farm crisis. Brokers and other observers note that lenders, who aggressively pushed loans for farm purchases in the 1970s, are much more circumspect today, at least when it comes to land purchases. In many cases, lenders won’t provide more than around $6,000 an acre in credit for a farmland purchase, Walsten said. There are other differences. For one, farm incomes were declining heading into the 1980s, while now they are on the rise, Farrell noted. Also, while there’s been talk of hedge funds and other big speculators jumping into the market, farm purchases are still predominantly made by other farmers, experts say. An annual land survey conducted by Iowa State University found that 78% of farm purchases in 2012 were made by farmers. A large chunk of other purchases were made by people who live close by, such as retired farmers or business owners. That’s not to say there isn’t still a significant speculative element to those purchases, land brokers say. But a relative lack of leverage has helped soothe fears of a repeat of the 1970s and 1980s. “You will find that some of our ag banks clearly remember some of the issues they faced with collateral-based lending,” Kansas City Federal Reserve President Esther George said in July, according to Reuters. “So in the banking industry, we do not see the levels of leverage that characterized what we saw then.” Still, observers question whether lenders have as strong a grip on their farmer clients’ balance sheets as they think. Farmers have often been quick to use their cash reserves for land purchases. That means they could be hitting up those lenders for larger operating loans in the future, said Purdue’s Gloy, adding that the cost of inputs, including seed and fertilizer, are also running high. If you buy today at the market high, you’re kind of betting on the next five years being as good as the last five— Brent Gloy, Purdue University Unsurprisingly, operators are also dealing with a strong rise in cash rents, which could add to a squeeze if commodity prices see a sharp drop. That said, analysts say it’s still difficult to see what, at this point, would trigger the waves of forced selling and foreclosures that would make for a new crisis. ‘You just walk away’ Professional investors are finding they need to be much pickier about purchases. Shonda Warner, managing director of Chess Ag Full Harvest Partners, which manages a series of farmland investment funds, says she would be willing to buy around one in five farms that she looked at when she founded the business in 2006. Now it’s closer to one in 20. U.S. Trust’s Taylor said it has become harder in the last 12 to 16 months to find farms that fit the institution’s criteria. While cash rents have risen, they haven’t kept pace with the sharp rise in farmland prices. “We’ve seen a lot of farms come up for sale and we can’t understand how they paid the price they paid,” he said. In such cases, the buyers are looking at a return of around 2%, he said, noting that U.S. Trust looks for a gross lease rate of 5%. In such cases, “you just walk away,” he said. But like others, he expects farmland prices to return to a more normal trend. “If you continue to see people pay prices not justified — and if they start to do it with debt — that would be a warning sign,” he said. On a continuous basis, corn futures are down more than 36% in the year-to-date, with the December contract changing hands around $4.41 a bushel. Soybean futures are down around 8.2% year-to-date, leaving November futures just below $13 a bushel, while December hard-red winter wheat futures are off more than 10% since the start of the year to trade near $7 a bushel. Those are still attractive prices, but a decline toward the $3 level for corn and a continued slide for other crops would take a toll. Corn futures spent a large chunk of 2011 and 2012 north of $7. “The last several years have been phenomenally profitable. If you buy today at the market high, you’re kind of betting on the next five years being as good as the last five,” Gloy said. “That’s a pretty steep wager.” William L. Watts is MarketWatch’s senior markets writer, based in New York. Follow him on Twitter @wlwatts. Continue reading
Farming Investments In Romania Are About To Become Less Risky
Balkans.com Business News Correspondent – 21.10.2013 Farming investments in Romania are about to become less risky after the first agriculture mutual funds – which will take on the risks insurers do not cover – become functional in 2014. This will not only help stabilize farmers’ incomes in the event of calamities, but is also expected to lead to more favorable financing conditions. Mutual agriculture funds will become operational in Romania from spring next year, agriculture minister Daniel Constantin told BR last week. While the model is a first for the local market, it has a strong background in Western Europe. In Romania, the need to set up agriculture mutual funds has long been debated and has become more pressing in the context of climatic disasters such as last year’s drought, as well the more recent food safety scandals. importance of these funds stems from the fact that they essentially act as income stabilization tools which provide farmers with financial compensation for economic losses caused by such events as adverse weather and environmental calamities. Losses incurred due to such events are not covered by insurance companies. Had such funds been in place last year when the drought slashed farmers’ revenues, their shortfall would have been covered, explained Constantin last week during a Bursa conference. Economic deficits generated by price variations, as has happened this year after grain prices dropped following high production, could also be covered by the funds. Since Romania finally adopted EU legislation on agricultural mutual funds this summer, two local farmers’ associations have already announced they have begun procedures to set up such entities. The first was the National Federation Pro Agro, which was followed by the League of Romanian Farmers’ Associations (LAPAR). Under the current law, mutual funds can be set up as non-governmental organizations whose running costs in the first three years are covered by EU funds. Any local farmers’ organization can set up a fund but one of the main conditions is that its members represent at least 30 percent of the country’s farming surface area. Constantin told BR that under the current law, up to three such funds can be set up but that he hopes, and is willing to help mediate, that in the end only one fund will be created as this would make it stronger. However, no matter how many funds are founded, what is important is for farmers to join one. “Membership is voluntary (…). Farmers will have to choose between the mutual funds available on the market at that time. On the other hand, there is an incentive for every farmer receiving subsidies to join a mutual fund by reducing the subsidies from the national budget by 80 percent,” Pro Agro’s president, Alexandru Jurconi, told BR. Once farmers understand the benefits, they will join, even if this happens after they are faced with loss-generating situations, commented Constantin. The main purpose of setting up such funds is to reduce risks for farmers, but they should go onto generate other improvements such as easier access to financing and ultimately even cheaper bank loans. Membership of a mutual fund is an additional guarantee for banks that major agricultural risks – adverse weather, animal disease, environmental accidents and all the economic losses these cause – are covered. This will automatically lead to better financing conditions, explained Jurconi. Moreover, members of an agriculture mutual fund could also benefit from lower insurance costs. Agriculture mutual funds will be complementary to the products insurance companies offer farmers. However, the mutual fund will be able to negotiate insurance costs for all its members which should lead to more favorable insurance policies for farmers, added Pro Agro’s president. The cost of benefitsThe funds will mostly draw on public sources – 65 percent of the compensation will come from the state and EU funds, and the remaining 35 percent will represent members’ contributions. The amount of money farmers contribute to the Pro Agro Agriculture Mutual Fund will vary depending on the risks covered. For basic risk coverage the level will be affordable for all members, regardless of their size, said Jurconi. “Of course, for special contingencies, especially when we talk about calamities, the contribution level will be different as the compensation payable in the event of losses will be substantial,” he added. Regardless of the level of the contribution, the sums farmers pay will be capitalized and, in the absence of financial compensation, can be withdrawn. Where land for which a contribution was paid is sold, the buyer will receive all rights of use, including the subsidy and the contribution to the fund. Pro Agro says it will start with some 1,300 members, accounting for more than 4 million hectares of farmland. This should change by the end of the first year of activity given the incentive to join a mutual fund and the setting up of other such funds. Better late than neverAgricultural mutual funds could have been set up in Romania as early as 2007, the year the country joined the EU. Had this been done, the local agriculture sector might have looked very different from how it does today. But now that things have finally been kick-started and farming is about to become a less risky business in Romania, more concerted and long-awaited effects could be seen in the years to come – easier access to financing, a better capacity to absorb EU funds and in the end a more competitive agriculture sector. Business Review Romania Continue reading
