Farmland values are impacted by a myriad of factors beyond just demand and the overall agriculture economy.
David Klein, First Mid Ag Services vice president, managing broker and auctioneer, provided the seven issues affecting farmland values during First Mid Ag Services Field Day.
Here are the seven issues not in any particular order of importance as presented by Klein.
1. Next generation enterprise systems. Klein said First Mid Ag Services is receiving calls from those interested in growing organically and calls from outside of the area from people interested in buying land to grow industrial hemp, both a source of demand for buyers of farmland.
Another demand source is the livestock and land combinations for constructing large hog confinement buildings, perhaps buying more “B” type soils and than using the manure from that, as well, and that could be for an organic or conventional standpoint. They’re looking for moderately priced land base to service the needs for livestock.
Wind energy is another piece of the land demand equation. Those dollars get reinvested quite often in more farmland.
While solar energy expansion has not reached fruition, interest remains. An Illinois Society of Professional Farm Managers and Rural Appraisers survey of members in August found nearly half of the respondents said solar energy options were signed on farms they managed, but nothing has been constructed. There have been over 300 applications for solar projects across the state and 20 have been approved.
Another next generation issue is the “Beyond Meat” development and growth of the plant-based patties. It is providing another option the consumers are looking at beyond the typical farm-grown products.
2. Alternative investments. “Last year, because everything else was bad and us being just OK, farmland was at the top of the investment return rankings by asset type chart. But, obviously, there was a resurgence in the stock market this past year, and that has come back up. Those are investments that people look at,” Klein said.
The cash return on investing in high quality farmland this year is about 2.5%, compared to, for example, a Vanguard money market account earning 2.27%, or a bank money market account earning between 1% and 1.5%.
Farmland is still running very competitive to the S&P 500 or the NASDAQ.
In looking at farmland returns compared to other investments from 1970 to 2017, the annual average return in Illinois was 10.14% for farmland, 10.09% in NASDAQ and 7.02% in the S&P 500.
“That is still as attractant, even if we aren’t seeing huge increases in farmland values right now. They still want to be a part of that,” Klein said.
3. State government policy. While Illinois’ government may be a bit of a headwind, there are policies that are beneficial for investing in farmland. North Dakota, South Dakota, Kansas, Oklahoma, Minnesota, Wisconsin, Iowa and Missouri all have corporate and international ownership restrictions. As a result, that means they have fewer buyers in their pool that can purchase farmland.
“But in states like Illinois, Indiana, Arkansas, Mississippi, folks from other countries or pension plans and things of that nature have a much easier time investing in farmland in our state. That helps bring about a demand base that provides support because when we don’t have money as farmers to buy ground, those folks can step in and fill that demand base. That’s actually a good thing because it helps keep our balance sheets if you already own farmland halfway stable,” Klein said.
Illinois real estate taxes are an issue as they have doubled over the past 10 years. Assuming a goal of 3% cap rate of net income, the increase in real estate taxes reduced the value of the farm approximately $900 per acre over the last 10 years just because of the increases in real estate taxes.
“There’s also the talk that people are leaving the state. That’s true, but it’s been happening since the 1940s, so it isn’t like it’s a new thing. Our population relative to other states has been going down and places like North Carolina, Georgia, Florida and Texas have all been increasing,” Klein said.
4. Farmland market supply. Estates continue to be the No. 1 source of farmland that comes into the market. In an August survey by the ISPFMRA, 60% didn’t believe there would be much of a change in the farmland to be sold supply.
The supply has been relatively tight. That helps keep the price relatively stable also because there hasn’t been a push a lot of supply into the market.
There was a slight increase in public auctions, up 4% to 39%, in 2018 compared to private treaties, down 3% to 46%. Private treaties started to exceed auctions in Illinois in 2015.
“As we look forward, we continue to see that listings and private treaty negotiations are probably going to continue to still be the upward trend unless we see a real resurgence in land prices. If we see a real resurgence in land price, then it would stand to reason that we would start to see more auctions. But that’s a long-term trend over several years now,” Klein said.
5. Rising interest rates. “The No. 1 concern as we talk to professionals is interest rates. … They have continued to fall as they have across the country and world. This is a positive for land values. It provides lower interest rates for borrowing, for operating loans, for land loans, and it also reduces the competitive alternative of somebody just leaving it in the bank. If they’re leaving it in the bank and making less money than from buying a farm and getting a return on that, then they’re more likely to buy a farm,” Klein said.
“The Fed’s job is really two things. Make sure we maximize employment and keep prices fairly stable. It is not to keep the stock market up.
“Mortgage rates continue to drop. We’re getting back close to historic lows. That’s helpful. Our dollar is high and strong. That’s not helpful.”
6. Farm income. Income is primarily based on acres multiplied by production, combined with input costs and grain prices. Then there are the federal government influences of ethanol policies, trade and tariffs and farm program payments.
Market Facilitation Program payments are going to help and it’s a different income sequence than a year ago. Also affecting net income, the spring soybean price for crop insurance was not as high and the corn price was high.
“As we got into June, sometimes you just had to plant corn to be able to have enough insurance to pay your rent. That, obviously, increased our corn acres,” Klein said.
“A significant portion of the large 2018 corn inventory was able to be priced at higher values in the May to July period. Corn is back in the driver’s seat, and that is the crop that’s driving us going forward until something is negotiated out with China. That’s going to drive crop insurance decisions. That’s going to drive income decisions, planting decisions. It also drives rent levels and incomes looking forward. Some of the past demand issues that we had are waning.”
7. ‘End-of-cycle’ economics. This is the longest period of economic expansion since 1945, but it’s only at a 2.3% annualize gross domestic product rate, the lowest of any other expansion periods since 1945.
Unemployment is extremely low. All of the millennials are starting to become fully employed and typically as the unemployment rate goes down, the inflation rate goes up.
“We haven’t necessarily seen that as this point because a lot labor has been replaced worldwide, not just domestically,” Klein said.
“Farmland has a strong correlation with inflation. So, as a result, when inflation does take off, farmland usually increases right along with it. We went through a period of very low inflation, and if it does start to take back off, your farmland values should start to take off with it.
“As the number of millennials increase in employment, they also will spend more, and inflation is generated by more spending. As those numbers become bigger, I think you’ll see some inflationary pressure from those folks.
“Farmland is a hedge against inflation. Don’t forget about that. That’s the reason we buy it besides the fact that we have it for our own living.”