Click here for a pdf of the original Successful Farming article including charts and graphs.
A LONG-TERM LAND AND AG PROFIT OUTLOOK
IS THIS A SHORT-TERM CORRECTION, OR IS IT THE START OF A BUST?
The biggest question that comes up at the end of my seminars and webinars is,“What are land rents and land prices going to do?”
I work with many landowners and farmers who rent land, so sometimes I hesitate to answer that sensitive question. However, after seeing a lot of projections and analysis that looked just plain wrong to me, I decided to do some research so I could lay out my analysis and my projections.
There are hundreds of factors that impact a farm’s value in areas across the Corn Belt. Following are what I consider to be the top five factors that affect land prices.
1 The supply of land. I have watched twice in the last 40 years when a lot of land was placed on the market.
The first time was in the mid-1980s when a lot of land was forced on the market during the farm crisis. Many farmers were forced out. In some areas, as much as 10% of the land changed hands. The second and most recent time was in 2012. Over the long term, about 4% of the nation’s farmland is sold each year. For the current situation, I don’t anticipate a lot of forced sales. That suggests values will remain strong.
2 Farm profitability. I have watched land sales increase when land prices are at either extreme. In the 1980s, prices were extremely low. A lot of land was put on the market, values went down even more, and that forced more land on the market.
In contrast, three years ago, prices and profits were very high. Many farmers and farm families wanted to sell ahead of the capital gains tax increase. That year, more land than usual (I estimate it was about 6% to 8% of farmland) was put on the market.
The timing to sell was also good. That was the year corn rallied to over $8 per bushel, soybeans to over $17 per bushel, and the outlook was very bullish for commodity and land prices. Every month during that time, there was a new record for land prices. You know what happened.
By 2014, corn futures dropped back to $3.18, soybeans to $9.04, and wheat futures dipped below $5. Land values have dropped in an orderly market. Farmers are not being forced to sell, so if the bid is not high enough, there’s not a sale, and the land goes off the market.
3 Interest rates. During the 1980s farm crisis, the prime rate jumped to 21%. Long-term mortgages were as high as 11%, if they were available at all. This added to many farmers’ cash flow problems. With long-term bonds yielding over 11%, who wanted to risk owning or financing farmland?
Now, short-term rates are very low; long-term mortgages are at 3½% to 5%. This has been very positive for land prices. If long-term rates were to jump by 3% or more, it would be negative for farmland prices. I do not forecast that (in fact, I think the odds of that happening in the next decade are extremely low), but to be honest, I never thought we would see rates this low 10 years ago.
4 The global value of the U.S. dollar. When interest rates went sharply higher in the 1980s, the U.S. Dollar Index traded as high as 164. That made our farm products very expensive in the global markets. As export demand dropped, prices fell, adding to farmers’ cash flow problems.
In 2012 and 2013, the U.S. dollar traded in a channel between 78 and 82. Our exports were very competitive, and demand and prices both improved. Then, grain prices and farmland values soared higher. Now, as I am writing this in mid-December, the dollar has rallied to five-year highs, and it is approaching 90. Long term, if the dollar continues to rally and gets above 100, it will slow down exports and take grain prices lower.
5 Crop revenue. By far, the number one driver of land prices is crop revenue. The more important chart to look at when projectingland prices is the corn revenue chart (on the previous page). Notice the long 100-year base from 1886 until 1996. You can see the huge run-up into 1980, the bust into 1986, and then the explosion higher. Many farmers with good corn yields in 2012 had a larger gross income on that farm than they had paid for the land 10 years ago.
Look at all five of these factors together. What do they say? What is going to happen? The trend is not straight up. However, it is still a long-term up trend. Buying land now is difficult. It may not look smart two or three years from now, but I bet it will look like a good idea 10 to 20 years from now.
So here is my forecast. I do not see a 1980s-style bust developing in farmland prices. I view the current slump as a normal and healthy correction in a long-term bull market. One final observation I have noticed a huge divergence in land values based on quality. Good-quality, highlyproductive land is only down 10% (or maybe 20%) from the high in land values in 2012. Poor-quality land is off 20% to 40% – if it sells at all. Remember the old saying: “You pay for good land once; you pay for poor land the rest of your life.” So true.