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October 23, 2013
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Lower corn prices, expected drop in land values not yet loosening up farmground market

Skyrocketing prices and high demand for farmland in recent years have been a double-edged sword, and among those on the short end of the stick have been farmers looking to buy land, as well as those in ag real estate.

The situation isn’t getting better, many say.

Record-high commodity prices and record-high farm incomes — as well as oil and gas booms in some regions that have benefitted rural landowners — have left those who own ag land hanging on tight to what they have, since there’s money to be made.

In addition to few people willing to sell their land, the demand for farmground is still at a point where word-of-mouth is some times all that’s needed to get the price the seller wants. Farmground in many cases doesn’t need to be listed by a real estate agent.

And even now — with corn prices dropping from about $8 per bushel during last year’s drought down to under $5 recently, which, along with other factors, is expected to cause farmland values to dip in the future — the market isn’t loosening up yet.

Larry Hostetler with Colorado Land Investments, LLC, in Burlington, Colo., said he currently has less than half his normal number of listings.

Limited ag land listings has been an issue for about two years, he said, and it isn’t getting better.

Hostetler — who’s been in ag real estate for about 30 years, and whose business operates in nine different states — said the limited amount of available land is taking place everywhere, even in Brazil, where he also farms and does business.

“There just isn’t much out there right now,” said Hostetler, adding that farmground value and demand have also been helped in recent years by low-interest rates and the continued lack of other good investments on Wall Street and elsewhere.

From Feb. 1, 2012, to Feb. 1, 2013, Nebraska’s all-land average value rose 25 percent, according to the 2013 University of Nebraska-Lincoln’s Nebraska Farm Real Estate Market Developments Survey.

After each of the previous two years saw upswings of 22 percent and 32 percent, respectively, Nebraska’s 2013 all-land average value of $3,040 per acre was more than double the value of what it was just three years earlier.

Seeing the biggest boost in value in Nebraska from 2012 to 2013 was center-pivot irrigated cropland, increasing 30 percent and standing at $7,590 per acre on Feb. 1.

The value of non-tillable grazing land rose 19 percent to $695 per acre.

Additionally, those farming on leased ground saw an increase in rent prices — adding to their long list of increasing input costs. Across Nebraska, center-pivot irrigated cropland cash rental rates for 2013 were reportedly 13-15 percent higher than they were a year earlier.

Those in Colorado say they saw similar increases during 2012.

Alan Duensing — an appraiser for American AgCredit, which has offices across Colorado — said the average chunk of farmground under center-pivot irrigation in ag-heavy Weld County, Colo., sold for about $7,000 per acre during 2012 — about a 45 percent increase from what it was in 2011.

In addition to high commodity prices and low interest rates, the demand for northeast Colorado land is high and prices skyrocketed in 2012 due to the rapid growth of the region’s dairy industry (the area needs 50,000-plus dairy cows to meet the demands of a new Leprino Foods cheese-processing plant in Greeley, Colo.) and due to increased oil and gas activity (about 75 percent of Colorado’s oil and gas production is taking place in Weld County).

Duensing, who said comprehensive land-value numbers for Colorado in 2013 aren’t yet available, explained that prices this year have stayed strong, but certainly aren’t seeing the increases of last year.

Ranches ‘red hot’ right now

Like Hostetler, Mike Lashley with Lashley Land in North Platte, Neb., said, with farmland in high demand in recent years, his number of listings has been down — currently about 30 percent below normal.

Lashley added that, in addition to high commodity prices pushing farmground values upward in recent years, high cattle prices are now increasing prices demand for ranches and pasture.

Cattle prices have been surging during the past couple years — following the 2011 Texas drought and widespread drought of 2012 and 2013, which caused feed shortages and forced a number of ranchers to liquidate herds. This year, the U.S. cattle herd was its smallest in 61 years, and, with numbers limited, cattle prices began to hit record highs.

Now, with the drought improving in many areas, ranchers have been trying to expand their herds to take advantage of high cattle prices, and have been buying up land to do it, Lashley said.

“That’s really about the hottest thing out there right now,” Lashley said. “You’ve got cows selling for about $2,500, and steers going for around $1,200, so you’ve got a lot of people wanting to expand their herds.”

Still a draw for non-farmers

While commodity prices have dropped recently, Lashley said he’s optimistic for agriculture, and expects his number of listings for available land to stay tight for a while.

“It’s hard to remember a time when the crop guys and cattle guys were both doing well at the same time, like they have been for the past couple years,” Lashley said. “The need to feed everyone is only going to increase. I just don’t see the demand going away.”

Something else he doesn’t see going away is non-farmers investing in ag land.

The trend became a hot topic during the past couple years, and Lashley said his business is still seeing plenty of that.

“I’d say about 65 percent of our business ... here in western Nebraska ... is with outside investors,” Lashley said. “That’s not slowing down.”

A price drop, but no bubble burst

A number of experts, including UNL ag economist Bruce Johnson, believe that the ag-land market is close to topping out, or already has in some areas, and land values could see a drop down the road.

“I definitely think we’re in the early stages of leveling off,” he said. “There are so few market sales going on that we don’t have many good indictors of what’s happening. In some cases, you still have two competing bidders paying a really high price for land. But across the corn belt and much of the U.S., I’m expecting the drop in corn prices to play a part in the leveling off farmland values.”

Johnson noted that while corn prices have been in the $8 per bushel range in recent years, long-term projections call for corn prices to stay around or even under $5 per bushel through 2020.

“I still see farmland as a good investment,” he stressed. “I just don’t see farmland values continuing to increase by 20 percent or more each year. That’s behind us.”

While some concerns linger about a potential ag-land bubble burst, experts, including Johnson, think any approaching drop in land prices is unlikely to be as sharp as in the early 1980s — a time when land purchases were financed largely with debt and not so much with farmers’ own capital, according to economists and bankers. In the 1980s, interest rates on loans eventually soared and crop prices declined. Many farmers then didn’t have the income needed to pay the bank, and they had no choice but to unload their real estate, contributing to the sharp decline in land values.

Land purchases during the last few years have been made with farmers often using anywhere 50 percent to 75 percent of their own cash, bankers say.

According to the U.S. Department of Agriculture, the debt-to-asset ratio on farms is expected to be the lowest level on record in 2013.

A drop in land prices now means farmers are only losing the investment of their own cash, and aren’t deeply indebted to the local bank.

Those factors are likely to limit the severity of any drop in farmland prices.

“We might let a little air out of the bubble, but I don’t see it bursting,” Johnson said. ❖

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The Fence Post Updated Oct 22, 2013 04:01PM Published Oct 30, 2013 09:42AM Copyright 2013 The Fence Post. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.