Expect 20% to 30% rise in land lease rates in '09
For the first time since the big U.S. corn and soybean buys by the Soviet Union in 1973, the U.S. farmland market is being driven by demand, not supply. That means some farmers could be "modestly shocked" by what they see when they go to sign 2009 farmland lease agreements.
Demand continues to take land prices higher, and will continue to do so, at least in the near term, says CEO of the Westchester Group, Inc., Murray Wise. That could mean a 20% to 30% increase in farmland leasing rates in 2009, the farmland real estate analyst says.
"I'm here to say we need to be prepared for a rather significant increase in farmland leasing values as we move into '09 and beyond," Wise says. "I think that lease rates historically lag, and I think a lot of rental rates are significantly under where the economic cash rent would be today.
"Looking into 2009, maybe people need to get ready for a 20% to 30% increase in lease rates. There's a lot of underleased land out here in the Midwest today." Such an increase, he adds, could create a surge in alternative arrangements like adjustable leases.
It's all about world demand right now, Wise says, when it comes to both land and the grain raised on it. Grain demand is high and stocks are low, two factors that are resulting in tightening land price margins. This, in addition to farm input costs that are continually on the rise, will fuel an "incredibly interesting" war for acres next spring, Wise says.
"We're going to see some real gyrations in corn, soybeans and wheat as we go forward into planting the '09 crop," he says. "Input costs and prices are going to be major driving forces."
Despite the grain market volatility such "gyrations" indicate, Wise says he sees no signs that a sharp downturn -- like in the mid-1980s -- is ahead. "I do not see any downturn on the near-term basis or long-term basis with land values," he says. "We have different circumstances than in the mid-'80s. Yes, we do have adjustment in commodity prices, and I project we'll see a lot of volatility from a commodity point of view."
Wise sees 275 million reasons this volatility won't open the chute in the land market. He says Westchester Group has $275 million in uninvested capital. It's a sign, he says, that the demand for farm ground is far from a downturn.
"We're looking every day, 24-7, for more land. There's very little land coming to the marketplace, and what does come to the marketplace is consumed quickly," Wise says.
One more sign that the farmland market won't see a slash like the mid-1980s: The number of farms operating -- and more importantly, growing -- today in Iowa, for example, with no debt associated with land equity has grown considerably, and Wise sees this as continuing under current conditions.
"If you look at the average value of Iowa farmland in 2007 dollars adjusted for inflation, it might reflect tremendously high values. But, values are not all that great compared to what they'd be if you account for inflation," he says. "Sixty-two percent of farms in 1982 in Iowa had no note or mortgage associatieond with it. In 2008, 75% of the farms in Iowa have no note or mortgage associated with the land.