Farmland poised for more big gains in 2013

CHICAGO, Illinois ( -- Flush with cash, many U.S. farmers have already become active this year in purchasing land or paying higher cash rents. Because of the intense buying interests from farmers and institutional investors, farmland could see another 15%-20% jump in value in 2013, licensed farm managers, lenders and real estate brokers told a group of investors Monday.

The Chicago Farmers Group hosted the land value specialists at its monthly meeting in Chicago.

Along with good farmer earnings in the last 5 years, significant cash in the farm sector and increasing cash rents are all contributing to the upward trend in farmland values, according to Michael Morris, 1st Farm Services, Bloomington, Illinois.

Since last year’s harvest, when farmers knew of their money flows, the U.S. Midwest has seen a spike in land markets. “In Illinois, the land market was pretty flat from spring to fall. But, once the farmers had inventory and knew what the crop prices were, knew what crop insurance payments were, people started buying. So, we saw another 15% to 20% jump in benchmark prices,” Morris says.

If a good farm comes on the market, it sells fairly quickly. In central Illinois, land prices can reach as high as $12,000 to $17,000 per acre. “There are certainly some strong prices out there,” Morris says.

Land value projections

From July 1, 2012 to July 1, 2013, Morris sees farmland prices increasing 15%-20%, for the third year in a row. “If you look back three years, you could say there has been a 50% increase in land values,” Morris says. It’s been driven by commodity prices and cash rents.”

Bruce Ahrens, vice-president of marketing for Farmers National Company, Iowa City, Iowa, says that his company sold a record amount of farmland from October-December 2012. “Before the first of the year, increased sales were due to the capital gains tax laws. But now, land prices are going even higher due to a limited supply.

In Iowa, farmland is being purchased for over $12,000 per acre, Ahrens says. There are one-time sales that are going higher. But, a good piece of farmland is going for around $11,000-$12,000.

In Indiana, farmland values are seeing similar sharp increases. But, instead of spending $14,000 per acre for the land down the road, more farmers are improving the land they have, says Doug Deininger, managing broker for Capital Agricultural Property Services, Inc. “There is a trend about buying additional farmland. It’s all going back to the economics of corn and soybean production vs. location of the land,” Deininger says.

In addition, Deininger confirms that much like the other Corn Belt states, Indiana’s land market got hot after harvest.

Who's buying?

In recent years, farmland’s racehorse-like run-up in value, has ignited it as a favored new asset class for outside investors. This has led many to believe that U.S. farms are being swallowed up by outside ag interests. Not so fast, real estate and ag lender specialists say.

In Illinois, a 2011 survey by the Illinois Society of Farm Managers and Rural Appraisers showed 60% of the value of farmland transactions were with institutional investors and 60% of the number of transactions were with farmers. “This tells us the institutional investors are purchasing larger parcels. But, the majority of the buyers remain farmers,” Morris says. The Illinois group will release this year’s annual survey later this week.

In Iowa, 80% of the farmland is being purchased by farmers and 20% by institutional buyers, Ahrens says. “In Iowa, we have laws restricting the ownership of non-ag corporations. So, we won’t have the competition that the states do on either side of us.”

Specifically, sales receipts show that the majority of the parcels of land from 160 acres and less are being purchased by farmers, local and outside investors are buying parcels between 300-500 acres and the institutional investors are buying parcels over 600 acres.

Caution flags flying

Some economists worry that since so much cash has been spent to buy farmland, a drop in fall corn prices to $4.00 per bushel could spark liquidity issues. If liquidity is affected,  it could impact land markets in the future. Economists are getting a little  bit cautious, thinking that if the U.S. gets 168 bushel corn crop in 2013, there could be a drop in markets and that cash flow wouldn't be there in the fall, the land experts say.

“I don’t sense the worry from the farmers on land prices, because they are still buying a fair amount of it. But, we’re limiting our loans on farmland, Morris says. There is no fixed rate, because there are some factors that go into it. For instance, a shorter term is being offered for larger purchases. But, we’re cautious about how much we loan. For instance, on $12,000-$14,000 per acre purchases, we’re loaning 50%. We remember the 1980’s, when we got hung out on some farm loans. So, we’re cautious,” Morris says.

At one time, some lending institutions had a hard cap for farm loans, but some of them have since changed their policies.

Cash rents

As a major driver in farmland values, cash rents continue to jump up in the Midwest.

“In Illinois, we have seen farmers locking in cash rents in excess of $500-$600 per acre,” Morris says. “The $400-$450 per acre level is more typical. Cash rents are all over the board, but those figures would be average,” he says.

In Iowa, high producing farmland is being rented between $325-$475 per acre, Ahrens reported to the Chicago Farmers investor group.

In southern Minnesota, cash rents are being reported between $325-$450 and in eastern South Dakota between $165-$350.

“With some exceptions, the most profitable farmers are those that are renting more ground than owning it,” Ahrens says.

Reporter Notebook

  • IRS Code 1031 Exchanges are making a comeback. Those folks that sold land to developers in the last five years are being offered to buy the land back, due to a soft construction market.

  • There’s still a huge interest in farmland by institutional investors. The challenge is finding a big enough piece of land for them. They remain happy with their 3%-4% return on investment.

  • Indiana pasture rent rates are going up. Good pasture is renting between $50-$95 per acre.

  • Iowa’s farmers are holding a debt-to-asset ratio of 10.3%

  • There are three drivers of the ag sector to watch: Interest rates, China soybean demand, and ethanol production. All three are regulated by the government and any changes in any of them could impact the health of the ag economy, land specialists say.

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