Five Trends in the Farmland Market
With $3 corn and $9 soybeans, it’s easy to see why farmland values are declining. But don’t take our word for it. There are scads of reports from industry experts, including:
- The Kansas City Federal Reserve, which last month suggested farmland prices have softened from 3% to 5% from a year ago in Nebraska and Kansas.
- The Chicago Federal Reserve, which reported farmland values have declined an average of 1% in its states, which include Illinois, Indiana, Iowa, Michigan, and Wisconsin. However, value in Wisconsin and Illinois actually increased, while Iowa's dropped 6%.
Here are some of the trends we’re seeing.
High-quality land is still a valuable asset says David Klein, managing broker and auctioneer with Illinois-based Soy Capital Services. Take the August 25 sale of 640 acres east of Peoria in Washington County, Illinois, for example. The land averaged $11,600 per acre, with ranges from $9,800 to $11,600 per acre. “That tells me that high-quality farmland continues to be in high demand,” Klein says. All over the Corn Belt, we continue to hear that farmers are paying good money for high-quality land. Demand for that land will continue, Klein reckons.
Farmers are still buying. In the Washington County example, Klein says farmers bought most of the tracts. This continues to be the case in most sales, although we’re seeing more investor action in some of the sales we’ve tracked. “People are trying to make the case that outside investors are propping up land values,” says Steve Nicholson, analyst with Rabobank Financial. “However, farmers are still buying the majority of the land. Are there outside investors? Yes. But it’s not the majority.”
Lenders are cautious. Farmers are facing tougher times for the foreseeable future. “The majority of the farmer-buyers are using some form of leverage, and we are watching that closely,” Klein says. “Farmland will not cash-flow when you borrow too much money. We like to get three quarters of the purchase price as a down payment, either with cash or pledging more farmland.” The mid-year survey conducted by the Illinois Society of Professional Farm Managers and Rural Appraisers, released September 1, suggests that 80% of the farmland sales conducted in that state so far in 2016 featured some sort of borrowing.
Preemptive selling is starting. For farmers, financial stress is setting in. “Farmers are illiquid. They need cash to pay the bills. We’ve seen some farmers sell land to generate cash, and we expect we may see some more of that this fall,” Nicholson says. If raising cash is necessary, this strategy makes some sense. “Would you rather sell 600 acres now and right the ship a bit, or wait two to three years down the road and lose the whole business?” Nicholson asks. “I’m trying to get folks to think a bit differently.”
Expect more rent shake-up. Cash rental rates will continue to fall, with some farmers getting creative with rent structures that include a bonus payment based on yield or crop prices, Klein says. The ISPFMRA survey respondents reckon tenants will negotiate a $20 reduction in cash rent for 2017. “We expect to see more leases going to a variable cash rent with bonus,” Klein says. Adds Nicholson, “We’re not hearing that folks are turning to a crop share per se, but a formulaic way to deal with yield and prices, so that the landlord has some skin in the game and adjusts to the market.”