Bullish farmland prices out of bounds, farmers say
With the farmland price boom continuing, farmers see land as overpriced relative to its earning power, according to a new Agriculture Online poll. Eighty percent of the 660 respondents to the poll said that land was "way overpriced" or "somewhat overpriced."
Cropland values rose at a record rate in the last quarter of 2007, up 21% for nonirrigated land and 18% for irrigated cropland, according to a Kansas City federal reserve bank survey of its seven-state district. The survey notes that more farmers were active in the land market last quarter, and that prices were expected to rise again this year.
A study last fall at the University of Illinois questioned whether increases in farmland prices in that state are "outpacing increases in farmland returns."
In 2006 and 2007, farmland prices averaged 46% higher than capitalized values, says Gary Schnitkey, a University of Illinois ag economist. Capitalized values are a measure of what the land can earn from agriculture.
Land tenants and beginning farmers are feeling the sharpest sting of the current trend. Said one respondent to the Agriculture Online survey: "Land prices are getting out of control. I am a beginning farmer, and trying to find land is one thing, but once you find it -- what people are asking for rent is crazy. Everyone thinks with high commodity prices farmers can afford any price they ask."
A small percentage in the poll (9%) said they believe land is undervalued. "I think the major mover of prices at the moment is the simple fact that six out of the last seven years the world has consumed more food than it has produced, an interesting trend," says one farmer in that camp.
At least one expert believes that the ag economy is well in line with the bullish land market. "When you adjust today's corn price for inflation, even at today's levels, it is extremely reasonably priced," says Murray Wise, CEO of Westchester Group, a farm real estate and management company based in Champaign, Illinois.
Wise cites a long list of other positive indicators for U.S. agriculture -- rising global demand for grains and oilseeds in general, but particularly growth of Chinese demand for corn, vegetable oils, pork and poultry. "Chinese demand for corn just simply continues to accelerate," Wise told Agriculture Online. "China used to be the third largest exporter of corn, believe it or not, and possibly in 2008 but definitely in 2009, they will become a net importer of corn."
Wise favors land over other investments. "The annual return in the last 10 years averaged slightly more than 11% total return, exceeding the stock market, corporate bonds and European equities, as well as treasury bills, and I believe the outlook for the next 10 years is a lot brighter than the last 10 years," he says.
"The fundamentals are nothing short of extremely bullish. This is only the second demand-driven market of my lifetime," Wise says. "We, as farmers, are used to supply-driven markets, where if there is a drought in Ohio, the price of corn goes up for six months in Iowa and your banker can't figure out why you didn't sell it all. Demand-driven markets are totally and completely different animals than supply-driven markets, and the farm population is having a hard time adjusting to and accepting the current scenario."