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rswfarms
Senior Contributor

Farmland prices: Is the bubble about to burst?

Article that is on every's mind that owns farmland. I purchased most of my farmland during the 1986 to 1989 time period just after the mid-1980's Farm Crisis. However, I remember the Farm Crisis very well and the affect it had on Iowa. I do think you need to run the current Return on Investment numbers for farmland to get a good picture and not just generalize about the current farmland market. If you run the ROI numbers you will see a pretty big difference between today and the 1981 to 1986 time period. Worth the read. Article is below:

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Farmland prices: Is the bubble about to burst?

 

Christopher Doering, Gannett Washington Bureau12:48a.m. EDT March 24, 2013

Experts think a 1980s-like crisis is unlikely, but concerns linger.

WASHINGTON -- Record-high prices for corn, soybeans, wheat and other commodities have left growers flush with cash to purchase more land. And what the farmers don't pay for out of their own pockets, historically low interest rates provide them with easy and cheap access to money to close the deal.

The favorable mix of both cash and credit has provided fuel to drive up land values across the Midwest, stoking fears of a bubble ready to burst.

In Iowa, where rich soil, favorable weather and ethanol and livestock production help foster demand for limited growing space, farmland values have soared 90 percent since 2009. An acre of farmland that a decade ago sold for an average of $2,275 now goes for $8,700, according to Mike Duffy, an economist at Iowa State University who watches land prices.

It culminated last October when an 80-acre parcel near Boyden in Sioux County, some of the most fertile ground in the Corn Belt, sold for a record $21,900 per acre.

"The concern clearly is not so much how much higher are they going to go, but when this bubble breaks, how low will they go and what will the aftermath of that be?" said Michael Hein, vice president of the Liberty Trust and Savings Bank in the southeast Iowa town of Durant. "If profits start to diminish, there will be an impact on land values as well." Hein called the recent increase in land values "not sustainable" and said if they do rise in 2013, it will be at a more moderate pace.

Colin Johnson, a fourth-generation farmer, who rents land from a dozen different property owners in and around Wapello County, has been careful not to get swept up in the bidding frenzy.

He was approached in 2012 by two who were looking to sell, giving the 36-year-old corn and soybean farmer the first chance to make an offer.

Colin Johnson has been careful not to get swept up in the farm land bidding frenzy. The fourth-generation farmer rents land from a dozen different property owners in and around Wapello County, Iowa.(Photo: David Purdy, The Des Moines Register)

Each time, Johnson lost out to a competitive market with buyers willing to pay far more than he could afford.

"The (landowners) went the route of 'I'm going to take the high dollar,' and I don't blame any of them for doing that," said Johnson, a husband and the father of three children. "Land is just bringing such a premium, and I believe it is highly inflated right now. I can't take that risk as a person with a young family."

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 farmers' 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.

The crash was especially severe in Iowa, where the value of the state's farmland plunged from $2,147 an acre in 1981 to a low of $787 five years later, a drop of 63 percent. A third of the state's farms went out of business.

Since then, farmers have become more financially conservative, leaving them in a better position to weather a downturn.

Land purchases during the last few years have been made with growers regularly using 50 percent to 75 percent 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 in 2013, according to the U.S. Department of Agriculture.

A drop in land prices now means farmers are losing the investment of their own cash rather than being left in a lurch with the local bank. It doesn't mean they won't feel the heat financially, but it's likely to prevent as many farmers from getting irreversibly harmed and, at the same time, limit the severity of a drop in land prices.

"The shock absorber is the enormous amount of farmer capital that they have invested in real estate," said John Blanchfield, a senior vice president and director of American Bankers Association's Center for Agricultural and Rural Banking.

"The cautionary tale is this: Farmers hate liquidity. They just can't stand to have money in the bank, and so an enormous amount of farmer liquidity has been invested in real estate. If there is a rapid correction in commodity prices ... the liquidity that farmers should have had to tide them over in a poor cash flow period" has been invested in land, he said.

Banks such as Liberty Trust and Savings have responded by becoming more conservative in their loans as farmland values ascend. Hein said the bank has been cautious about financing too much debt-per-acre in a land purchase because of concerns that a sustained drop in crop prices could reduce a farmer's income and increase the chance of default on the loan.

"We're here to make loans, but the undertone is still one with a lot of caution," Hein said.

Last month, the USDA predicted more typical weather conditions in 2013 would generate a record corn and soybean harvest, which it forecast would push the average crop prices for corn to $4.80 per bushel, down a third from the prior year, and $10.50 per bushel for soybeans, a drop of 27 percent.

Ultimately, how land prices react hinges largely on the weather and if the water-starved Midwest receives enough moisture this year to help it rebound from the 2012 drought — the worst since the Dust Bowl of the 1930s.

Here is a rough outline of how the commodity price-land value equation works: A retreat in commodity prices would mean farmers stand to receive less money for their crops. Meanwhile, an increase in interest rates would make it more costly for farmers to borrow money from a bank to help finance a purchase. At the same time, farm operations are likely to continue to be squeezed by higher costs for items such as seed, fuel and fertilizer. The result is that farmers are willing to pay less for a parcel of land or they forgo the purchase altogether.

Some farmers, such as Joe Heinrich, vice president of the Iowa Farm Bureau Federation, are content to stand idle as the land-buying frenzy unfolds.

Heinrich, who hasn't purchased new land since 2005, hasn't ruled out making a purchase if the location is close to his current operation and the quality of the farmland is right.

"There is land that's in the area that if it did come up for sale, yeah, we would be interested. But we're not going out there to buy land just for the sake of buying land," said Heinrich, 52. "You want to save for the things you want to buy. We know there are those situations in the area that at some point" the land will be available for sale, he said.

 

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13 Replies
rswfarms
Senior Contributor

Re: Farmland prices: Is the bubble about to burst?

I did get a kick out of this article that said: "Farmers just hate to have money in bank".

Looking around my area in Northern Iowa, this observation is so very true. It is also true for myself, since I am looking to add a small amount of farmland to my operation. However, with the current farmland market in my area, there isn't even 1 farm for sale in the 2 county area that I own farmland in. Very, very, much a sellers market currently in the Iowa farmland market. There is a rumor that a 160 acre farm may come up for sale in my area next month to settle an Estate, but that is just a rumor currently, not fact. Anyway, related to the above, I would say that over 90% of farmers like an investment they can walk on and get there boots dirty, not just a piece of paper saying how many shares of a SP500 Index Fund that you own. I think a major reason for this is that your farmland investment is really an Investment in yourself and how well you manage your farm operation. Seems most farmers feel more confortable in an investment that has something that they can control to some extent, unlike owning stocks or bonds.

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Faust100F
Advisor

Re: Farmland prices: Is the bubble about to burst?

Quote:

 

"Heinrich, who hasn't purchased new land since 2005, hasn't ruled out making a purchase if the location is close to his current operation and the quality of the farmland is right.There is land that's in the area that if it did come up for sale, yeah, we would be interested. But we're not going out there to buy land just for the sake of buying land," said Heinrich, 52. "You want to save for the things you want to buy. We know there are those situations in the area that at some point" the land will be available for sale, he said "

 

Yeah! now Mr. Heinrich can pay almost three times as much as he would have back in 2005 if he had not been gutless, real great financial decision.   I especially liked his reason for not wanting to purchase a farm, guess . . . he never learned the difference between "wants and needs", if you are a farmer you need land.  

 

I doubt he will ever purchase another farm because he will never live long enough to see prices decline to a level they were in 2005.  I mean . . . everyone knows all these sales in Iowa are for "cash", hell our farmers are so flush they just write the check . . . my ass!

 

I get a kick out of the Liberty Bank Fella saying they were being conservative on loans, hell I wonder when the last time they made a loan any body?  Give me a break, would you lend a farmer or businessman money when you can earn 3% on Treasuries at now risk and in many cases borrow money from the TARP fund at .50%.  

 

I don't know why they even bother talking to bankers because all the REAL banksers in Iowa are dead, these guys are like car salesmen.   The will make you a new pickup loan, or a loan to buy that new lawnmower from your favorite John Deere Dealer (because that is all they sell anymore).  

 

I have heard of no Bank in the DSM area making loans to businessmen, or farmers.  So these banks are wanna bees, blowing smoke, because they have no risk taking ability, ever since the wanted to piss with the big dogs and couldn't quite get off the porch.  

 

I just love their former bank excuse, "we will not make loans for less than $500,000 because it is just too much paper work handling smaller loans."  What a friggin joke.  What we have in that article is not one person who has risk taking ability, not Duffy, or should I say Daffy, not the bankers, and especially the gutless farmers who have "wants" instead of "needs.   Adios Amigo. John

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Kay/NC
Honored Advisor

Re: Farmland prices: Is the bubble about to burst?

Land is rarely a BAD investment, if you can afford to buy outright, or weather the storms that seem to inevitably come. As lng as any purchase optimizes ( which is not usually simply the same as maximizing) an operation's existing assets, then it is a good thing.

Doesn't directly apply to your custom-farmed operation, but if machinery costs can be spread over more acres, for example, without spreading manpower too thin, that is a good reason to buy land. If you want more acres just to justify more and bigger equipment, then the choice is a poor decision.

Some people have trouble identifying the difference. Land, like any other asset, needs to serve its specific purpose in your asset picture. Pride is a bad reason to buy anything.
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R John
Frequent Contributor

Re: Farmland prices: Is the bubble about to burst?

"They aren't making any more of it." How many times have we heard that one? That may have been a good reason to buy before global trade was so prevalent. Now we compete with the rest of the world to fill demand and we've taught others to  produce. And they use our ag tech to compete with us while not required to pay for its developement. JD and Monsanto / Pioneer are in South America, Europe and Asia and that's where our competition is today.  Jobs to produce those technologies are gone from the US to those areas as well.

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rswfarms
Senior Contributor

Re: Farmland prices: Is the bubble about to burst?

Yes Faust, an interesting article. In the 4 county area of Iowa I own my farms in, the banks are not writing any loans because there is currently not even 1 farm for sale within 100 miles of my operation. I have checked the 2 big hitters of farm listings for Iowa who are Hertz and Farmers National and absolutely zero farms for sale in my 4 County area. Believe this is a first, in the past there seemed to always be a few listed. I think it was that possible Capital Gains issue that made people rush to sell there land and now there are not anymore people that plan to sell, at least in 2013. You would think this extreme shortage of Iowa farms for sale would have an influence on farmland values. But with not much sale action hard to gather any data. I have heard of banks in my area requiring a 50% downpayment or requesting a large chunk of your debt-free farmland as backing for a loan. It will be interesting to see the Iowa State University Farmland Value Report at the end of 2013.

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clayton58
Veteran Advisor

Re: Farmland prices: Is the bubble about to burst?

Kay, surely you know the cycle farmers are in don't you?  the steps are buy more land to spread machinery cost over more acres, then you need more and/or bigger machinery to get over the acres in a timely manner. then buy more land to spread machinery costs.  And so it goes. It does not matter which step you start with, once you are on its an endless cycle.

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Kay/NC
Honored Advisor

Re: Farmland prices: Is the bubble about to burst?

I " know" it from observation, not participation. One of my functions in managing our operation is ferreting out bottlenecks and figuring out how to cost-effectively eliminate them. One of the biggest potential problems is overkill.
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clayton58
Veteran Advisor

Re: Farmland prices: Is the bubble about to burst?

I really did not think you be caught in that trap but it seems many are. That trend seems pushed by many of the "experts" and can be hard to resist esp with the good economic times lately
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425Cat
Advisor

Re: Farmland prices: Is the bubble about to burst?

Its called plain and simle GREED

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