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ihtractortherap
Senior Contributor

leveraged equity

Been finding out a lot of high price land was bought not with cash but with leveraged equity. Not a recipe for success in a downtrending market
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18 Replies
BA Deere
Honored Advisor

Re: leveraged equity

Banks only went along $3-$4,000 on this $13,000 land and the stories were all "Farm sells for $15,000 cash!!!!"  weeeeeell, I`ve always questioned their definition of "cash".  There was alot of shuffling around to come up with this cash.  Elevators offered cheap financing of inputs but then they had a lein on the crop and the grain check needed the finance company to sign off before the check could be cashed.  Seed companies have "0% No payment until November next year!!!". 

 

 

That was all fine and good when there was money in farming, but I`m afraid now some chickens are coming home to roost.

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ihtractortherap
Senior Contributor

Re: leveraged equity

Another trick has been to take short term debt and long term it out in equity in the land, per some banks suggestion.
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sw363535
Honored Advisor

Re: leveraged equity

It is just a way to get the bank in a comfortable position....

Like when they see equipment, seed, fertilizer, houses, etc   in a very overpriced position

Believe me you hear a lot of "blue smoke" on this issue.  Bank and lending and land .................money....

 

I am qualified to make the following statement  ........ I have a little personal comment on the lies told especially in this area of discussion.  "Sometimes it is a Quaker lie.  Those are the lies that  are truth, but leave out some of the truth!"

 

 

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Red Steele
Veteran Advisor

Down 40% in my area

Four recent area sales of $6000 to $6500 per tillable acre on that $10,000 per acre land that "they aren't making any more of". My gut feeling is that we will see some decent land sell for $5000 per acre soon as there is a glut of land that needs to be sold according to land professionals that I talk to. Heirs, etc, that have been waiting for the rebound from $7500 to $10000 per acre. They probably lost the bet on this one.

 

The "young tigers" that fueled the $10000 sales are de-clawed for now, and the price has to entice old guys with dollars in the bank and/or good credit to stick their necks out, now. Guys that knew $8 corn was this generations abberation, and not something to project for 30 years out.

 

$5000 on 200 bushel per acre land will get me interested.....if corn will stablilize at the $4 mark, that would generate about a 4% return, and the downside would seem to be pretty limited. The consensus is still that the US govt is going to keep printing money, so it could easily end up being a 10% return per year. THe real danger is high real estate taxes...some farm land already comes with a $60 per year real estate tax bill, per acre. If corn is $3 per bushel, that equates to 20 bushels of corn each year, just for the taxes. Ouch.

 

What must suck now is to have a lot of $10,000 per acre land that you are trying to pay off with $3.50 corn, and you cannot even liquidate it in what is turning into a buyers market, although you still hear about an occasional $10,000 per acre sale. I guess that is why you hear about it...it is now an out laying bit of news.

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timetippingpt
Honored Advisor

Re: Down 40% in my area

Red...you said "young tigers" that fueled the run to 10k land...what in the world are you dreaming up. No one under 45 paid that for land in Indiana. No, it was the old cash rich elephants with a long memory of what unlimited currency creation and zero interest rates due to the value of the currency,  with no where to put their money that did that. And, just for the record, that land won't be sold again for at least another generation, it is all tied up in trusts or LLC's that forbid its sale. Of course, maybe our area of Indiana is far better managed than where you are, but I doubt it, plenty of "irrational LL's" out here...(Land Lovers).

 

Maybe the younger/mid-life Tigers drove cash rents to destructive levels but they had almost zero impact on land values. I really doubt that anyone in our area really cares if land drops back from 10000 to 8000 (its easily still 10000 right now), just let them buy some more. 🙂

 

BA Deere
Honored Advisor

Re: Down 40% in my area

Around here there wasn`t a typical landbuyer at the lofty levels, it was everybody and anybody and alot of surprises.  I suppose most typical would be a "70 something money bags' at a auction with his 40yr old son and 15yr old grandson. 

 

The surprises that I found were opperations that seemed to be allergic to owning land when it was $2,000 and were happy owning their 200 acres and renting what they could.  But when land got $10,000 plus they started bidding with both hands.  The only thing that makes sense is they were laying in wait, but got in a panic when land started doubling tripling and quadrupling within a 5 year span.

 

Alot of this high priced land wasn`t bought with "farm money"  implement dealers and car dealers just must have had a ton of cash and they partnered up with a farmer or had a relative that farmed or some story and that cash was parked in high priced farmland.  These people just must have $10`s of millions just laying around and they don`t bat a eye writing out a $5 million check every once in awhile, they probably aren`t even aware of the price per acre, just the size of check they need to write out.  i don`t see land like that having to go on the auction block.

 

In the past I`d see 80 yr old guys still raising cattle and would think the nation`s beef is supplied by retired guys collecting social security doing it as a hobby.  Today there are a few grain opperations that are funded by a city slicker, kind of a "high tech Green Acres Oliver Douglas" that does some of the fun stuff work but mostly farm as a version of a huge playground sandbox.  Perhaps one day their children won`t share that passion and the land will be sold, but until then it`s off to the races   🙂

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Red Steele
Veteran Advisor

Re: Down 40% in my area

BA, I can relate to the 200 acre owner/renters buying the $10,000 land because I saw it happen, too, but they probably had a few hundred thousand dollars in the bank for the first time in their lives, and it looked like the thing to do. $8 corn has a way of filling up your business account quickly. WHen land was $1000, $2000, and $3000 their accounts were empty. I think that is the most logical explanation for the run up. Everyone became a potential buyer. Now the tide has gone back out, as Warren Buffet says.

 

And for TIme, maybe it IS different in Indiana....Minnesota is not an "old money" type of state...we don't have operations as old as some of yours I am sure.

 

BOught a corn dryer a couple hours north of where I live (I live in south central MN, about an hour up from the Iowa border) and the father/son I bought it from farmed nice black soils, and said no one in their area ever paid much more than $5000 per acre and they couldn't understand southern MN, Iowa, Eastern SD etc. going crazy. So prices definately are localized.

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vrbuck
Advisor

Re: leveraged equity

We had more sparbo farms buying land for the owners children then we had joe blow 40 nothing buying land here. It was the 70 year olds buying ground and the banks only loaned up to 4000 an acre at the most. The buyers are not hurting financially and land ain't going to crash. Look how many of you are sitting on a pile of cash waiting for the right ground to bounce on. Cash is out there to buy it you just want it for your price.
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sw363535
Honored Advisor

Re: leveraged equity

again,,,,, it is the distortion of taking interest rates out of the equation.  Locally we have been seeing old, deep pocket money buying land not young producers.  And if a young producer buys, it is pushed by investor buyers.

Actually not much land has changed hands over the last few years.  In a couple of over priced cases, the same land has sold 3 or 4 times in a ten year period.  Absentee investors mostly.  But that stopped when the price started down to produce a "no sale".

Producers have pretty much been locked out of land buying by price.  It's really simple, investors are desperate for any return over 2% and producers need 10%+ to make the investment work..

 

We are in a position for real estate taxes to keep going up....

 

Producers are in a tough spot renting.  They can easily find themselves in a position where they can't afford to buy and can't afford to let it go....   But better be willing to let it go.

 

It is a big threat to agriculture as we have known it..... The corporate takeover may be upon us...

 

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