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Rural Economy Woes Drag On; Will Farmland Keep Falling?

Though grain prices have fallen a lot more than 5% in the last year, new analysis shows that's about how far ag lenders in the nation's center expect farmland values to fall in the next year while other key indicators of farm economic viability continue to erode.

The latest Rural Mainstreet Index (RMI), longtime Creighton University economist Ernie Goss' measure of fiscal health in the 10 states whose economies depend on agriculture or energy, shows -- not surprisingly -- the rural economy continues to struggle in the face of myriad factors led by faltering grain prices.

"The stronger U.S. dollar, weaker global growth, and abundant supplies have pushed U.S. grain prices down by more than 30% over the last 12 months. This has weakened the farm economy," Goss says. "The same factors have weakened oil prices, and I expect these lower prices to begin negatively affecting areas of the region heavily dependent on energy commodity sales."

The RMI is growth-neutral at 50 out of 100. The latest data gleaned in October show the RMI has slipped to 43.4, down from the previous month's 48.2, and the lowest since early 2010.

The same measure for farm and ranchland, Goss says, has suffered more than the general farm economy; for the 11th month, his RMI for land is below the growth-neutral point, falling to 20.2, its lowest level since the beginning of 2006. That's a 13-point decline from September.

“According to bankers, there has been little change in the proportion of farmland purchases for cash. Approximately one fourth of farmland sales in October and June were not financed," Goss says. "It is surprising that as crop prices have deteriorated, there has not been a significant change in the share of farmland purchases that are financed."

Part of that, Goss says, is because a lot of farmers had already forward-contracted grain for prices above current levels, buffering the impact of the overall market downturn. However, there's also an investment community out there right now that continues to see land as a solid investment in the broader context of the equities and other commodities. Both should continue to feed a market that trails well behind the grain markets in its slide in value.

"If you have purchased farmland in the last two years and are worrying about putting the top in the market, you are not alone. There have been five other high-price plateaus since 1950, and within a few years they were all glad they bought when they did. Remember the long-term view you had when the purchase was made," says Harvest Capital Group director Scott Oakes in a report from Peoples Company. "I advise taking advantage of opportunities to buy farmland this year that would fit well into your farming operation, or investment portfolio. The average decline in land prices is 4%, if we take out the minus-63% slide of the 1980s. One big advantage you have currently as a land buyer is that there is much less competition than during the past three years, which should translate into a lower purchase price."

Still, farmers are split on whether the relatively stable land market is just that, or only appears so based on fundamental factors that may have not yet manifested themselves.

"Farmland prices may adjust to evolving idiosyncrasies in the market in a somewhat rational manner, but the sky is not going to fall . . . We have a new baseline in effect as a result of the Great Recession," says Paul Dufek, Livermore, California-based real estate analyst, farmland market watcher, and member. "New technologies and this new economy establish a new baseline for farmland price points. Farmers have never been more efficient than in today's current ag environment. And, today's demand and outlook for farmland is very different from that of the previous decades . . . Since the Great Recession, farmland has now established itself as a staple in almost every major pension fund portfolio manager's arsenal."

Not everyone agrees, though. "Farmland values will fall significantly by the time this is over. And poof -- like magic -- watch record farm debt-to-equity ratios appear when land values adjust to the true fundamentals. Idiots who expanded rapidly and bought farmland at record-high prices are about to get a rude awakening," says Harold Smith, member and farmer from Shelbyville, Indiana. "Fundamentals that led to a record runup in farmland prices are all unwinding at the same time, and the result is predictable. History repeats itself over and over."

Whether Dufek or Smith is right, whether land continues to hover at values relatively higher than the grain markets underpinning them, will depend on geography and farm makeup moving forward as much as it does traditional fundamental and outside factors, says Nathan Kauffman, Omaha branch executive for the Federal Reserve Bank of Kansas City. That's mainly because these days, livestock farmers are facing much better market conditions and overall net returns than those raising only crops.

"Similar to regional variations in farm income, state-level differences in farmland value changes reflected industry concentration and commodity price trends. When crop prices were at record highs, Nebraska posted some of the strongest annual cropland value gains in the District; however, after crop prices dropped, cropland values in Nebraska edged down. Cropland values in Oklahoma and the Mountain States, however, posted stronger year-over-year gains in the third quarter, Kauffman says. "Bankers cited the rebound in the livestock sector, easing drought conditions, and rising land-lease revenues from mineral rights as factors supporting rising cropland values in those areas."

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