The last year has been tough for many Colorado farmers and ranchers. Drought, heat and wind have all affected their ability to produce. However, even with the hardships, farmland continues to hold its value.
According to the Rural Mainstreet Index (RMI), which is put together by Crighton University’s College of Business in Omaha, Neb., growth is rural areas, and farmland values, are strengthening according to the April survey of bank CEOs in a 10-state area.
“Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included,” the survey states.
It continues, “This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy. Goss and Bill McQuillan, president of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.”
The RMI, which ranges between 0 and 100 with 50.0 representing growth neutral, climbed to 58.3 from March’s solid 56.9.
“For a seventh straight month, Colorado’s Rural Mainstreet Index (RMI) remained above 50.0. The April RMI slipped a bit to a still strong 73.1 from March’s 75.2. The farmland and ranchland price index expanded to 83.0 from March’s 71.2. Colorado’s hiring index for April expanded to 68.8 from March’s 67.8,” the survey stated.
In Wyoming, it was a little slower. “The April RMI for Wyoming advanced to 55.1 from 52.8 in March. The April farmland and ranchland price index decreased to 58.0 from 61.8 in March. Wyoming’s new-hiring index climbed above growth neutral with an April reading of 53.2 down from March’s 53.9,” it said.
Overall, the farmland price index dipped to a still strong 66.9 from March’s 67.2. This is the 41st consecutive month that the farmland-price index has been above growth neutral. The farm equipment-sales index declined to 57.3 from 60.5 in March.
“Crop farmers and businesses linked to crop farming and energy continue to experience very positive economic conditions with improving balance sheets,” said Ernie Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton University. However, there are some negative outcomes from the agriculture expansion. Rapidly increasing farmland prices are causing concerns for bankers. David Callies, CEO of Miner County Bank in Howard, S.D., said, “Increased agriculture land prices and rent cost are hurting our smaller operators as well as younger, beginning farmers.”
The high values for agricultural land also affect those who are renting the land, which can result in decreased profits. In general farmers are doing fairly well, but this increased cost, coupled with other increased input costs, can drive smaller farmers out of business.
Many small scale and young farmers cannot afford to purchase large tracts of land, and this land can be doubt by investors.
This month in the survey, bank CEOs were asked about the share of farmland sold to nonfarm investors and the proportion of farmland sold for cash. Bankers indicated that almost one in five, or 19.8 percent, of sales were to nonfarm investors. This is almost identical to last April’s 21 percent. Bankers reported that approximately 28.6, only slightly less than last April’s 29 percent, of farmland sales were for cash.
“Despite very strong growth in farmland prices, bankers are indicating little change in investors’ appetite for farmland. Likewise, farmland price growth over the past year in excess of 20 percent for parts of the region did not alter the share of land purchases for cash,” said Goss.
In the state of Colorado, agricultural land is valued based on a 10 year average of income. For this year, the average income from 2002-2011 will be used to determine the value.
This value in value comes despite poor conditions. According to the U.S. Drought monitor for April 23, 100 percent of the state is under some category of drought. Almost half of the state falls into the two move severe categories, being extreme and exceptional.
Most of this area is on the Eastern Plains, where a large majority of the crop production comes from in the state.
Range conditions have seen some improvement in recent weeks, but are still not back to normal. “Rain and snow provided needed moisture to isolated areas across the state, but the long term outlook is still uncertain. Current conditions were rated 53 percent very poor compared to the five-year average of 10 percent,” according to the April 22 edition of the Colorado Crop Progress Report.
Even so, farmland has shown to continue to have positive returns nationally. The National Council of Real Estate Investment Fiduciaries (NCREIF) has released its first quarter 2013 results of the NCREIF Farmland Index. The total return for the first quarter was 5.44 percent, comprised of 4.42 percent appreciation and 1.02 percent income return. This is the highest first quarter return since the index began in 1991. The next closest first quarter return was 4.02 percent in 2006.
The 5.44 percent return is significantly higher than the 3.78 percent total return in the first quarter 2012 and the 2.38 percent total return from first quarter 2011. The difference in performance is all attributable to appreciation; income returns differed by one or two basis points.
The trailing four quarter total return of 20.47 percent is the highest total since fourth quarter 2006, when returns were 21.15 percent. The four-quarter rolling return from a year ago was 16.73 percent.
The alternating trend of better performance between permanent cropland and annual cropland continued again this quarter. Annual cropland had a 6.82 percent total return compared to permanent cropland’s 2.78 percent return. This marked the seventh consecutive quarter that the property subtypes alternated in outperforming each other. Annual cropland has outperformed permanent cropland in the first quarter the last six years. 2007 was the last time permanent cropland performed better in the first quarter.
Annual cropland’s 6.82 percent return was split between 1.00 percent income and 5.82 percent appreciation. The rolling four quarter total return was 19.50 percent. Permanent cropland was split 1.06 percent income and 1.72 percent appreciation with a rolling four quarter total return of 22.28 percent.
The Mountain region was the best performing area in the first quarter. The 14.58 percent total return exceeded every other region by at least 500 basis points. Most of the return was driven by appreciation, 13.37 percent.
Christopher Jay, Chairman of the NCREIF Farmland Committee and Director of Financial Analysis with Prudential Agricultural Investments, noted that: “The first quarter income and appreciation returns for the Farmland Index were lower than fourth quarter 2012 but outpaced the first quarter returns from a year ago. During the fourth quarter, there tends to be a number of properties reappraised along with the harvest of several crops taking place. So, we expect a first quarter drop off. However, the one-year total return is at 20.47 percent, suggesting continued strength for the U.S. farm economy.” ❖