A new report from the Rabobank Food & Agribusiness Research and Advisory group says that 2017-18 could be a make-or-break period for individual land values. Those values are tied to both commodity prices and land rental rates, which the group describes as “unsustainably high” at current levels, according to the report, “The Land Value Wave Dips: Land Values Set to Decline Further, Despite Sticky Rental Prices.”
From 2006 to 2013, significant increases in commodity prices signaled the need for more land to be converted to row crop production, the report notes. The subsequent steep increases in ag land values pulled enough acres into row crop production to oversupply most commodities, both domestically and globally.
“The result of this oversupply has been to drive agri commodity price levels below breakeven. After 2 years of economic losses at the farm level – which resulted largely from the significant drop in commodity prices – the cost of renting land remains sticky and unsustainably high,” notes report author and Rabobank senior analyst Sterling Liddell.
According to Rabobank, in 2017/18 and moving forward, rent values need to begin dropping in order to balance with lower commodity prices over the long term.
“We believe this will lead to the valuation of land also adjusting lower,” notes Liddell. “If rental costs remain sticky at unsustainable levels through the 2017/18 growing period, individual land assets face the threat of much deeper devaluation, as nutrient and crop protection programs are cut and abandonment (usage changes) increases.”
Five key highlights from the report:
For commodity prices to increase, at least some land will have to come out of production. The report’s authors contend that “the current acreages levels for corn and wheat can easily produce above the current domestic and global demand levels.”
At least right now, only soybeans could sustain an acreage increase, the report states. But barring a drought in 2017, a big shift to soybeans would push that crop into an over-supplied situation, as well. Unless overall crop acreage declines among these commodities, that would set up 2018 as the fourth year in a row with below-breakeven prices. To balance supply and demand, it would take a reduction of 3 million to 5 million acres over the next 3 years, the authors estimated. That’s about a 2% drop in plantings for corn, soybeans and wheat.
Reductions in planted acres will create “additional downward pressure” on ag land values. This already is happening in Corn Belt states. Regions that grow grains mainly as rotational crops will be affected, as well, but it might take 1 to 2 years before land values stall or decline. Regions cited included the Plains, the Mississippi Delta and the Northwest.
Land is becoming less attractive as an investment vehicle. In 2016 the return on owning farmland dropped to the same level as long-term government bonds, according to the report.
Potential for an farmland asset bubble exists, somewhat. Declining land values over the last 2 years support the argument that a “low probability” exists for a bubble in 2016. At the least, though, land values will have to decline or equity requirements for the buyer will need to increase to compensate for loan amounts relative to market value. Unless land values decline by 10% to 15% over the next 2 years, it will become more difficult to finance farmland at all.
Key risks in all of this include:
- Weather volatility. While land value declines seem inevitable, a prolonged drought could slow the trend for a couple of years. On the other hand, bumper yields and more oversupply could speed up a decline in values.
- Potential for higher interest rates. An increase in interest rates “remain the most significant threat to land values.” Higher interest rates, if they materialize, would be difficult to absorb, given commodity prices and declining liquidity. Also, less money could be available for land acquisition if potential investors opt to move money into higher-yielding long-term bonds.
- An aging farmer population. Farmers approaching retirement might be more inclinded to sell farmland if they sense that land rental values will further decline. In other words, they’ll cash out land equity now and invest it in other places. Essentially, they will take the money and run. That would throw more land on the market, further depressing values. The big unknow here is the average farmer’s “emotional attachment” to the land and whether that will affect how many of them liquidate the asset.
Want a copy of the report? Contact your local Rabobank ag office. Reference this article.