As land values escalate, are we headed for a farmland crash?
Land -- God isn’t making any more of it. And, with other investment opportunities lacking, farmers, ranchers, and plenty of people outside of agriculture, continue to eagerly invest in this precious asset. The result has been extremely high and growing land prices. Could we be headed for a crash?
It’s hard to see how the investment in land pencils out. In my neck of the woods, pasture is selling for around $2,000/acre and $5,000/acre for cropland. Pasture rent is $50-100/acre, and crop ground rent ranges from $150-300/acre. That’s up significantly over the past five years or so.
In an article that appeared in the American, farmer and commentator Blake Hurst writes, “Farmers have cash, and nowhere to invest it but farmland. Farmers largely ignore equities, as they tend to balance the inherent risk in farming by investing in what they perceive as less risky places. We aren’t dumb, however, and have figured out that it's a losing game to invest in bonds or CDs at rates less than inflation while we’re in tax brackets we never even knew existed.
“So, farmland prices are booming. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the last seven years. According to Federal Reserve studies, farmland prices were up 15% last year in the most productive part of the Corn Belt, and 26% in the western Corn Belt and High Plains. Closer to home, a neighbor planning his estate had an appraisal done in 2010 and again in late 2012. In that two-year period, the value of his farm had doubled.
"According to Iowa State economist Mike Duffy, Iowa land selling for $2,275/acre a decade ago is now at $8,700/acre. A farm recently sold in Iowa for $21,900/acre. “A debt-to-asset ratio of 30% can enter dangerous territory with a land price drop of 50%, which sounds like a lot, until you remember that is a price level last seen only 24 months ago in much of the Midwest.
“The number of farmers in the Kansas survey with a 40% debt-to-asset ratio is higher now than it was in 1979, and those farms with a debt-to-asset ratio of over 70% are three times as numerous today.”
Many fear a return of the 1980s crash, but, according to the Sioux Falls, SD, Argus Leader, farmers are better prepared to weather a financial crash this time around.
“The inevitable drop in land prices is unlikely to be as sharp as in the early 1980s, when new purchases were financed largely with debt and less with the farmer’s own capital, say economists and bankers who work in the agricultural industry. When interest rates on their loans soared and crop prices declined, many farmers no longer had the income they needed to pay the bank. They had no choice but to unload their real estate, contributing to the sharp downdraft in land values.
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“Since then, farmers have become more financially conservative, leaving them in a better position to weather a downturn. Land purchases during the past few years have been made with growers regularly using 50-75% of their own cash. And the finances of the farm are stronger than ever, with the debt-to-asset ratio expected to be the lowest level on record this year, according to the USDA.
“A drop in land prices now would mean farmers lose the investment of their own cash rather than being left in a lurch with the bank. They still might feel the heat financially, but it’s likely to prevent many farmers from getting irreversibly harmed and, at the same time, limit the severity of a drop in land prices.”
It’s no secret farmers hate liquidity; they are always looking to put their cash to work -- whether it be buying a new tractor or a piece of ground. I think the lesson here is to be conservative in what you purchase and make sure it makes sense for your operation. It’s easy to bite off more than you can chew, and if I’ve learned anything in the last four years being home on the ranch, it’s that I’ve got to be patient and let my investments work for me.
Are you buying land? What are land values in your neck of the woods?