Mariwyn Evans writes about commercial real estate for REALTOR® Magazine. You can reach her at firstname.lastname@example.org.
Farm Land Rush
Are prices too high? Are there still opportunities to invest? Experts weigh in.
September 1, 2011
“It’s a feeding frenzy out there,” says Renee Harvey, ALC, of Century 21 Harvey in Paris, Texas. Farmers, private investors, and institutional owners are bidding up cropland prices to record highs, fueled by commodity prices that rose 29 percent in the year ending March 2011, according to the U.S. Department of Agriculture. In the Midwest alone, prices rose 23 percent during 2010, according to the Federal Reserve of Chicago, and have since spiked higher. Total returns for farmland were 2.4 percent in the first quarter of 2011, up 1.3 percent from a year ago and the strongest first quarter return since 2006, according to the National Council of Real Estate Investment Fiduciaries Farmland Index.
The eye-popping prices and impressive returns, in large part, reflect the relative scarcity of land for sale. Amid rising food prices, owners aren’t inclined to sell. “There’s just not much on the market and finding property for buyers takes a lot of networking,” says Ray Brownfield, ALC, of John Greene Land Co. in Oswego, Ill. In fact, the 2010 annual report of the Illinois Society of Professional Farm Managers and Rural Appraisers found that 57 percent of the farmland sold in the state came from estate sales. With relatively few sellers, transaction volume has stayed low, despite liquidity in the market. Data from the Farmers Credit Services of America, an Omaha-based lender, found that transaction volume on crop and pasture land in Iowa, South Dakota, Nebraska, and Wyoming dropped 54 percent in three years from 2,326 sales in the first quarter of 2008 to 1,074 sales in the first quarter of 2011.
The appeal is easy to understand. “High-quality farmland can generate a 3 to 4 percent annual cash-on-cash return with low volatility,” says Murray Wise, ALC, of Murray Wise Associates, headquartered in Champaign, Ill. Compare that to a yield of less than 1 percent on six-month Treasuries, and you can see why income-hungry investors love farms.
Rising rents have also kept returns high despite higher land prices. In Illinois, for example, the cash rents for the mid-third range of leases on excellent farmland rose from $183 per acre in 2007 to $319 in 2011, according to a survey by the Illinois Society of Professional Farm Managers and Rural Appraisers. More owners are negotiating flexible profit-sharing agreements to capture rising commodity prices, says Winnie Stortzum, ALC, GRI, a land broker and appraiser at Farmers National Co. in Arcola, Ill.
Six Keys to Farm Land Value
Farmland investment income rests on crop production for much of its return on investment. What makes for a productive farm?
- Soil quality
- Water availability and control
- Fertilizer requirements
- Percentage of tillable land
- Proximity to transportation
Another draw is land's inverse correlation with the stock market, says Jeff Conrad, president of Hancock Agricultural Investment Group in Boston. “You really saw that in 2008,” he says. Investors worried about inflation like that land is a tangible asset.
But even with strong investor activity, there are doubters. Yale University economist Robert Shiller, famous for predicting the fall in housing prices, cited farmland as his “favorite dark horse bubble candidate” over the next decade in a spring 2011 article in Slate. Some investors are already pulling back, especially in the hot Midwest farm belt. “When land reached $10,000 an acre in the first quarter of 2011, it was a mental stopping point for some cash investors,” says Mark Goodwin, Goodwin & Associates in Shorewood, Ill. The U.S. Department of Agriculture is also reporting slight drops in income streams from such major crops as cotton, oilseeds like soybeans, and feed grains for the first quarter of 2011. Part of the challenge is that “the agricultural industry doesn’t set its own commodity prices; that’s done by traders and speculators,” says Kirk Goble, ALC, with The Bell 5 Land Co. in Greeley, Colo.
Many agriculture brokers agree that there may be a 5 percent drop in land prices, but “as long as people from developing countries want to increase the quality of their diets and their protein consumption, commodity prices and land prices will remain very strong,” says Mac Boyd, ALC, GRI, of Farmers National Co. in Arcola, Ill.
Another factor that mitigates a sharp drop in agricultural land prices is the low debt-to-asset ratios for most farmers today, says Conrad. “Farm debt is the lowest it’s been in 30 years. That’s not the sign of a bubble.” Brownfield agrees: “The average mortgage debt load for farmland purchases today is less than 20 percent.” Many current buyers are coming in with all cash. Those who do use debt are putting 40 or 50 percent down.
Does that mean that farmland investment is bulletproof? Not quite. Government policy—particularly anticipated changes in farm subsidies in the 2012 farm bill—could have “a significant impact on what goes in the farm market,” says Stortzum. While subsidies aren’t as critical when commodity prices are high, land ownership would get much riskier without some sort of federal backstop, notes Brownfield. A rising dollar could soften demand, while higher interest rates could pull investors away to higher returns elsewhere.
Given the high prices and retreats in commodity prices, are there still opportunities in farmland investment? Yes, but only if you’re savvy and flexible, say land experts. Finding willing sellers is the toughest part, since only about 1 percent of U.S. farmland turns over every year, says Wise. His tip: If you do find a farm, be ready to make a cash offer in 24 hours. Other buyer-finding advice: Check tax rolls for absentee owners, who may have inherited farm property and now live far away.
Bargain hunting can also pay off. “It’s an imperfect market. Sometimes there aren’t any aggressive buyers at an auction, and the land sells for less than the perceived market,” says Randy Hertz, alc, of Hertz Farm Management Inc. in Nevada, Iowa. Another way to get a better buy: Look beyond the top cropland markets of the central Midwest to somewhat less fertile, but more affordable, land in states like South Dakota, he says. The Mississippi Delta, similarly, hasn’t been bid up as high, suggests Bob Turner, alc, with Southern Properties LLC in Cordova, Tenn. “Prices per acre are averaging $2,500 to $3,500 in our area,” he says. Another option: Focus on commodities that are soft at the moment, like wine grapes and cranberries, suggests Conrad. When these products rebound, land prices will rise, too.
A Comeback for Ag
The strength of farmland prices is even pulling some undeveloped transitional land back into the farming fold, says Nancy Surak, ALC, CCIM, of Eshenbaugh Land Co. in Tampa, Fla. With prices on bank-owned transitional land down as much as 80 percent from the peak of 2005, “ag may be the highest and best use,” she says.
Farmers in the collar counties around Chicago are following a similar pattern, says Goodwin. Those who sold to developers for $75,000 an acre a few years ago are now buying it back for $15,000. “They’ll farm it for five to 10 years and sell it to a developer again,” he says. Much of this land is REO from larger banks, which seem more ready than smaller ones to take write-downs, he says.
In some cases, this farming or grazing use is a temporary way to qualify for lower agricultural tax rates. “You can get a fence up and cattle on a property in two weeks and substantially lower your carrying costs,” Surak says.
Comparably lower prices on build-ready land are also attracting buyer interest. “We sold almost 1,000 finished lots last year, every one we had listed,” says Surak. Homebuilders who have cash as well as regional investors are snapping them up at 40 percent of the average $25,000 replacement cost, she says. Other buyers for build-ready land include state and local governments and local housing authorities, which have used federal Neighborhood Stabilization Program funds to buy bank-owned land for new construction.
Even recreational land is getting the farm bug. “The biggest trend in recreational land is multiuse opportunities, including farming, timber, and habitat development,” says Derrick Volchoff, manager of Cabela’s Trophy Properties, a network of more than 250 independent real estate affiliates based in Sidney, Neb. Income helps to offset carrying costs as buyers remain hesitant in a weak economy.
Like all real estate, agricultural land prices are cyclical—so the highest of today will decline at some point. But as the world’s population grows and needs to be fed, the future looks bright for U.S. farmland and for those who sell and manage it.