Monday, February 20, 2012

Midwest Farmland Prices Update for the Year 2011

The Federal Reserve Banks of Kansas City and Chicago have come out with their 4th Quarter 2011 farmland price/credit conditions reports. It is always interesting to see how much farmland prices have changed in these reports, especially at year's end.

2011 was another stellar year in farmland price gains. It is reported that more absentee and elderly landowners were motivated to sell given these very high prices. Credit conditions remain healthy with cash from high commodity prices being used to make many of the necessary farm expense purchases.

The Chicago District reported the highest average gain in farmland prices since 1976, up a 19% inflation adjusted average for the year.

They attributed the rise to commodity gains, as follows, according to the USDA:
Corn, soybean, and wheat prices averaged 57 percent, 26 percent, and 45 percent, respectively, higher in 2011 than in 2010. Milk, hog, and beef cattle prices rose 23 percent, 21 percent, and 21 percent, respectively, although producers faced costlier feed as well.

Net farm income in 2011 was up 24% over the previous year. For 2012, the USDA is predicting an 8.2% reduction in net farm income.

The three states across these two regions showing the largest gains for the year were Nebraska (up 37.8%), Iowa (up 28%), and Indiana (up 27%). Farmers continue to be the main buyers of farmland in these two districts.

Many cash rents were negotiated up steeply for 2012, up 18% in the Kansas City district, compared to 6% higher the year before.

Federal Reserve Banks of KC [pdf]
Federal Reserve Bank of Chicago [pdf]

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  1. My questions: at present, do passive investors have a positive margin if they borrow to buy a farm at present? What would prospective return on equity look like, putting down the standard amount of equity? What the the standard LTV on ag lending?

    Typically, I find that speculators have to feed their investments at the end of boom, and that is why I ask the above.

  2. David
    There are so many variables to the questions you pose. If I recall correctly, small and local banks have been requiring greater amounts down for farmland loans the past several years while interest rates are lowest in several decades. Loan demand is small since farmers have cash to pay for both land and operating expenses.

    I suspect that the vast majority of investors buying farmland are paying cash, but I don't have a number for you. Land is not easy to get in and out of so it isn't a good place for speculators. They're better off in the commodity markets.

    One problem that I see is commodity prices are volatile and just because 2011 had high returns doesn't guarantee future returns. It all comes down to ethanol policy. All. If E15 is around the corner this craziness may continue for a bit longer.

    Bankers state that investors want to see a 5-6% return.

  3. Spot on Kay.

    From a friend who owns farmland in two counties in Northwest Iowa:

    "I cash rent it to a couple of local farmers, and we have a formula which pegs the rent to the price of corn.... its easy to manage....and annual rent produces a 5% -8% return."

    He's owned for some years so not sure at what point he takes the cap gain (if ever) on the land nor if the roi is still decent for new owners.


  4. "My questions: at present, do passive investors have a positive margin if they borrow to buy a farm at present? "

    short answer, barely.

    longer short answer, I did the math and I had a long list of other investments that looked better than farmland.

    YMMV. PS, been a long-time fan of your blog.

  5. The answer depends on the distinct farm operation that is purchased since buying "a farm" is different than buying into the sector like the hedge fund managers do.

    It's an inefficient market and there are deals being made today that are well justified even at today's prices.

    There are also plenty of marginal deals being done.

    Also, passive farmland investment arrangements can be straight cash rent or can include participation of what is sold. The returns vary depending on how this is structured.

    It also depends on the non farm aspects of the farm purchased. There might be other components of value from hunting/recreation, mitigation and conservation/biodiversity banking opportunities from the land. Is there conservation easement potential. What are the water and other natural resources?

    the manager may be looking to alternate land practices, ie no till, alternate/better crop choices, to boost returns. Is there a management plan specific to the farm that will result in higher sustained returns?

    So it depends on the distinct farm investment and all other components of value of the farmland acquired. and how the asset is managed and operated.