Tag Archives: outlook
U.S. Farmland Market Cooling Entering Key Auction Season
By Christine Stebbins CHICAGO, Sept 27 | Fri Sep 27, 2013 2:03pm EDT (Reuters) – The red-hot rush for U.S. grain land is cooling after years of record prices, but prime acreage is still attracting top dollar in the heart of the Corn Belt so far this fall, according to land auctioneers. “On higher quality land it’s been pretty strong steady, but on medium and lower quality land we’ve seen some pullback,” said Randy Hertz, CEO of Iowa-based Hertz Farm Management. “There’s a lot of uncertainty out here in terms of what the future holds.” The key season for U.S. farmland sales is October through December, when Midwest and Plains grain farmers are rolling in harvest cash and planning their taxes. Most economists and bankers say it is too early to tell if land values have peaked. “We’ve peaked for right now unless the grain markets rebound sharply, when it might change things and go the other direction. But right now I think is probably a leveling off period,” said Eric Mueller, an auctioneer and broker at Omaha-based Farmers National, the largest farm management company in the country. Recent farmland sales from Ohio to Nebraska have ranged from about $3,000 an acre up to $16,000 for top quality ground. While prices are strong the rate of gain has eased from 2012 when prices jumped 20 percent to 30 percent. “Interest rates are creeping up a little. But, ultimately, I think the biggest factor is grain. There’s still a lot of money out there, but buyers are going to be a little bit less aggressive with the grain markets coming down,” Mueller said. “The sentiment is holding in Nebraska and Iowa.” Corn prices are down 30 percent since last fall on the outlook for a record harvest. But corn revenues this year are still seen strong with higher yields after last year’s drought. “Frankly the last 10 years have been phenomenal. It’s off-the-chart good,” said Brent Gloy, an agricultural economist with Purdue University. “It looks like to me this is the first time we’ve seen some substantial headwinds in the market for a while.” Chicago Board of Trade December corn on March 1 was $5.57, but closed at $4.57 on Thursday. A year ago, the price was $6.20. “If it becomes obvious that corn prices are going to shake out below $4 in the $3 range, we’re at a peak,” Gloy said. “The lower commodity prices are hard to justify the really high land prices we’ve been seeing. If you take high quality farmland in Indiana, if you get much over $10,000 an acre, you’ve got to have cash rents over $300 an acre, in some cases $400 or $500. If corn prices are below $5, it’s going to be hard to pay those rents.” Bankers and economists watch farm land prices closely. Land represents 85 percent of farmer assets – and loan collateral. Federal Reserve banker surveys for the quarter ended in June cited lower rates of gain in land prices. At the same time, bankers cautioned farmers against chasing price dips with borrowed money, dreading another 1980s farm debt crash. “The difference with the 1980s is that 75 percent of land then had mortgages. Today, 25 percent does,” said Jeff Obrecht, an Iowa-based real estate broker with Farmers National. “That makes a big difference. We just don’t have the debt out there that we had. Part of that is lenders are requiring more. If you buy at $10,000 acre, you’re going to have to put $5,000 down.” Auctioneers said that, in recent weeks, more ‘no sales’ have been reported at Midwest auctions as buyers think through revenue, cash and borrowing fundamentals. “When I sold a piece a property two years ago for $14,600 we got there in less than 5 minutes,” said Bruce Huber of Hickory Point Bank in Decatur, Illinois. “Some of these auctions are taking longer, fewer bidders. You can just tell the enthusiasm for the higher prices seems to be wanting yet the prices are still there.” So as land auctions pick up starting in October, auctioneers are expecting some price resilience. “Farmers buy about 70 percent of the farms in the Midwest,” said Hertz. “They’ve got cash, there are record amounts of cash. That cash at a bank or short-term deposits doesn’t pay much – essentially, less than 1 percent. Compare that to a farm that can earn 3-4-5 percent.” (Reporting by Christine Stebbins.; Editing by Andre Grenon) Continue reading
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
Global Farmland Offers Potential For Asset Deals
As the world’s population swells beyond seven billion and emerging markets’ appetite for food grows, Canadian institutions are getting increasingly hungry for agribusiness and farmland acquisitions abroad. Canada’s pension funds have long been putting their money into mining, energy and infrastructure, and more recently luxury retail brands, but now many are snapping up swathes of arable land or creating special investment vehicles to explore opportunities in agriculture. “We’ve seen this uptick in interest in investing in agricultural assets, and, I think the growing importance of food production overall in the world,” says Grant Jameson, who heads up the Canadian agribusiness practice at Norton Rose Fulbright. Canadian institutions, tired of the lacklustre returns in the market, are seeking options with better yields than gold and government bonds, such as agriculture, experts say. As the global standard of living rises, so too does consumer desire for different and fresher types of food, says Jeff Barnes, a partner at Borden Ladner Gervais LLP in Toronto. “As people get more flush, one of the small luxuries is to look a little wider for their food. And that’s going to feed agribusiness.” This year, Canada Pension Plan Investment Board launched its agriculture investment program, and made its first direct farmland investment in a portfolio of U.S. farmland. “These assets have historically delivered stable risk-adjusted returns but, more importantly, the outlook in the global agricultural market in the coming decades is positive due to increasing demand for a wide variety of agricultural products as populations and incomes rise in emerging economies,” CPP’s 2013 annual report states. CPP’s initial focus will be the U.S., Canada, Australia and New Zealand, it added. Meanwhile, the Ontario Teachers’ Pension Fund at the beginning of this year created a “natural resources” investment asset class. Teachers says it will look for “new opportunities in oil and gas and agriculture.” Last year, Caisse de dépôt et placement du Québec and British Columbia Investment Management Corp. joined with U.S. financial services company TIAA-CREF to create a global agriculture investment vehicle, with $2-billion earmarked to buy farmland in the U.S., Australia and Brazil. In 2011, Alberta Investment Management Corp (AIMCo), joined a forestry management firm in a $415-million acquisition of Australian timberlands — options for which chief executive Leo de Bever said included reverting it to agriculture. Farmland, with its steadily rising prices, is a tantalizing investment option – and one that provides interim income by leasing it to agricultural operations, says Mr. Barnes. “From the point of view of the investor, you are buying the land and you’re leasing it back to a farmer so you’re getting current yield,” he says. “The long-term bet is that this is an asset that people believe will be extraordinary in terms of how much it increases in value.” Canadian farmland values have risen steadily over the last decade, according to Farm Credit Canada, but spiked last year. During the second half of 2012, prices on average rose 10%, which is the highest since the organization began tracking farmland prices in 1985. The cost of farmland across the country in 2013 is at record highs, according to real estate firm RE/MAX, with low inventory pushing up supply in 15 out of the 17 rural markets it tracks. The greatest upswings were in Saskatchewan and Alberta. For example, the price per acre in east central Saskatchewan was $850-$2,500 in 2013, up from $650-$1,250 just two years earlier, RE/MAX said. The price hikes in southwestern Ontario have been particularly steep, according to farmland appraiser Valco. The average rate of increase over 10 counties has been roughly 25% per year since 2010. Land can cost upwards of $15,000 per acre. Farmland values across the globe between 2002 and 2010 have risen up to 1,800%, according to the Global Farmland Index compiled by U.K.-based real estate firm Savil. The biggest upswings have been in emerging markets, such as Romania and Hungary, it said. But the fact that prices have escalated so rapidly is a problem for potential investors, says AIMCo’s Mr. de Bever. He wonders whether the investment potential for farmland has run its course. He explains that the rationale for investing in land is that, with rising demand for protein in the Far East, existing landstock will become more valuable. Yet he points out that land values operate on a long cycle, and that the recent run up in value has been compressed into a short timeframe. “It’s not clear to me that any increase in farm prices is going to be rewarded with an appropriate return.” Still, Mr. de Bever says AIMCO, and other investors, will keep an eye out for farmland acquisitions — albeit a cautious one. “My guess is that there is still going to be quite a bit of demand. My concern is that I would be very picky and make sure that you’re buying right.” Mr. Barnes expects Saskatchewan to remain attractive, where land parcels are larger and the prices are a bit better. Australia remains attractive too, given the similarity in governing structures, compared to places with more instability such as Africa, he says. Other factors that will influence future demand include the trend of using technology to convert unsuitable land into arable land, in parts of South America, Mr. de Bever says. Some parts of Africa will emerge as better investment possibilities once they stabilize politically. “It is one of the areas where you will for the next while see a lot of growth,” Mr. Barnes says. “Whether it will be ticked with pluses and minuses, I don’t know. But it’s certainly an area that is very much in the front of peoples’ minds, especially since other hard commodities like metals are not so much in the front of their mind right now.” Financial Post Continue reading
