Despite the fifth year of lower commodity prices and projections for negative profit margins heading into 2019, farmland prices remain stubbornly stable.
Farm Credit Services of America, based in Omaha, Nebraska, reported its benchmark farm values down 1.4% in Iowa compared to six months ago, but up 0.7% compared to a year ago. In Nebraska, farmland values decreased a slim 1% in six months, barely changed from the 0.9% drop from a year ago. South Dakota’s farmland values slipped 0.6% compared to July and are down 2% compared to last January. Wyoming saw an increase of 3.1% in six months, similar to the 3.6% increase it saw a year ago.
“If you’re watching commodity prices, tariffs and the farm bill, you’re thinking land prices should go down,” said Steve Bruere, president and CEO of People’s Company, a real estate and farm management company based in Clive, Iowa, that does business in 22 states. “However, the No. 1 thing I’m watching is the percent of farmer buyers in the farmland market. As long as farmers are 70% to 80% of the buyers, land prices will have strength. Investors not willing to pay high prices are on the outside of the market.”
Farmers are willing to pay top dollar for farmland because they are buying for the long term, Bruere explained. They are not looking for an immediate return on their investment and will accept a capitalization rate of 2.5% to 3%. So, if the cash rent is $275 an acre with a cap rate of 2.7%, that implies a land value of $10,185 per acre — an amount an area farmer might be willing to pay.
“Farmer buyers still have the financial ability to make land purchases,” said Roger Hayworth, area sales manager for Farmers National Company, when asked about farmland sales in the Eastern Corn Belt and Delta. Farmers National offers real estate services and manages farms and ranches in 28 states.
However, investors generally shop for land with a 4% cap rate. So, the same piece of property renting for $275 an acre would only be worth $6,875 per acre to an investor.
“If the land market switches to farmers being only 60% of the farmland buyers, that tells me sellers are willing to accept lower prices that investors offer, and that can fundamentally change the market,” Bruere noted.
In 2018, 80% of the Iowa farmland buyers were farmers, 11% were local investors, 6% were out-of-area investors, and the remaining 3% were like-kind exchange buyers and others. Since the market peak in 2013, the percentage of farmer buyers in Iowa has bounced between 75% and 81%, according to Iowa State survey data.
INVESTOR INTEREST IS HIGH
Nearly 900 attendees from 30 states attended the twelfth annual Land Investment Expo in Des Moines in January. Bruere, whose company hosted the event, said it set a record for attendance. He even received text messages throughout the conference from clients in New York and San Francisco who are interested in buying land.
“Even in these challenging times for agriculture, farmer attendees are looking for trends, and non-farmers are becoming more interested in how their food is produced,” explained Bruere. “Part of it is the millennial food movement, and their increasing desire to connect with the source of their food. That trend is becoming more mainstream.”
While row-crop land prices aren’t yet at levels attractive to investors, Bruere said interest remains high.
“I get calls every day from farmers who would like to quietly sell an 80-acre parcel, but the seller doesn’t want his neighbor to know, doesn’t want an auction, nor a brochure printed,” Bruere said, adding that’s sometimes tough to do because the farm seller also wants a top price.
“Sometimes they call relatives or another landowner they have who might be interested in buying,” said Bruere.
Randy Dickhut, senior vice president of real estate operations with Farmers National Company, said there has been an increase of quiet sales to neighbors or investors where the land is never exposed to the market to determine a true market price.
FEW DISTRESSED SALES
Bruere, Dickhut and Jim Knuth, senior vice president at Farm Credit Services of America, agree: there haven’t been many forced sales.
“Most of the land sales are still estates and trusts, some divorce situations, some farmers letting go of pieces that aren’t core to their operation,” Bruere said.
DTN asked several lenders at the Land Investment Expo about distressed sales. They said land is the last thing a farmer wants to sell. Most of their borrowers have reigned in family living expenses, cut farm expenses, pursued additional income sources (on- or off-farm) and sold some nonessential machinery. In 2018, high soybean yields, pre-season marketing, Market Facilitation Program payments and expense controls kept most farm borrowers above water and able to pay bills. But lenders and real estate brokers worry about 2019.
“We’re starting to hear more talk about financially stressed farmers in areas who may have to sell a farm or other assets to improve their financial condition,” said Sam Kain, area sales manager in Iowa and Wisconsin for Farmers National Company. “Only 3% of our sales last year were due to financial stress, but we may see an increase in these in 2019.”
While net farm income levels have declined 40% to 50% from the highs six years ago, by comparison, land values have declined only 15% to 20%.
The good news for farmland values is the land is still in strong hands.
“Farm Credit Services of America’s borrowers have an average owner’s equity position of 69%, strong liquidity with an average current ratio of 2.52:1 and strong repayment ability with an average debt coverage ratio of 1.91:1,” Knuth said. They have also brought significant equity to their purchases with an average loan to collateral value of 48%, and most have locked in longer-term, fixed interest rates during 2018.
“The business of agriculture continues to reward producers who are increasing their financial and marketing acumen,” Knuth said, and that puts some producers in the position to buy more farmland.
Farmers National’s Kain said buyers’ enthusiasm is waning in some regions, which could soften land prices.
“Tension remains between land asset valuations and grain production revenue,” Knuth said.