Despite Drop in Commodity Prices, Farmland Values Rise

Despite Drop in Commodity Prices, Farmland Values RiseBy PAUL SULLIVANDAN LINDSTROM remembers looking at a piece ofNebraska farmland six or seven years ago that cost $3,300 anacre. Raised on a farm, he ran the numbers with his brotherwho is farming the family land and concluded that it wastoo expensive. He figured that with a 2 to 3 percent return,it made more sense to put the money into a dividend-payingstock and have his brother lease additional land.

A few weeks ago, Mr. Lindstrom said similarland sold for nearly $11,000 an acre.

This is a common story across the farm belt. InIndiana, William C. Ade, who made a fortunein oil and gas exploration in Asia, said hestopped adding to his 1,000 acres when theprice passed $5,000 an acre.

“Right now it’s at auction as high as $12,000an acre,” he said of land to grow corn andsoybeans in northwest Indiana. “A poor plot ofland went for $8,000.”

Mr. Lindstrom, who is a financial adviser atUBS Wealth Management in Omaha, and Mr.Ade, a member of the investment club Tiger21, are among investors who say they believefarmland could be headed for a serious dropin values, if not a full-on crash. Of course, manyof them have been thinking that for years.

The traditional view of farmland, from the farmer to theagricultural economist to the investment adviser, is, as Mr.Ade put it, “an inflation-proof bond.” (“No one is going tosteal it,” he said. “No one is going to default on it. If inflationgoes up, it will still be there.”)

After the financial collapse of 2008, most forms of real estatewere shunned. But not farmland. Prices shot up, driven byrising commodity prices from global demand, low interestrates in the United States and high auction prices begettinghigher prices.

Now commodity prices have fallen. Corn has gone to about$4.60 a bushel this week from over $8 a bushel last yearSoybeans have fallen to about $12.60 a bushel from over $17.Yet the value of farmland for row crops has continued to rise.”We’re kind of at an inflection point,” said Brent Gloy, aprofessor of agricultural economics at Purdue University.

“We’ve had five years of spectacular profitability that wassomewhat unanticipated. The U.S.D.A. was forecasting muchlower than this, so it surprised people.”Yet there are still reasons to think that there will be buyersfor land who will hold on to it for decades to come. A reportreleased by U.S. Trust highlighted the graying of America’sfarmers and their need to sell or lease their land as they age.

“Can land go up and down?” asked John Taylor, national farmand ranch executive for U.S. Trust, which manages 900 farmsfor investors. “Sure. But I’ve never seen land go to zero. Andwith world demand, there is no vacancy factor on good U.S.farmland.”

All of this raises the issue of whether it is time to sell.Brian C. Duke, vice president for Northern Trust, said thateven with the run-up in prices for commodities, the annualreturn of farmland remains about 3 percent. Since 2000,the value of land in Illinois, for example, has increased 207percent. For an investment comparison, The Dow Jonesindustrial average went up 42 percent in that period. Tripledigitappreciation has a way of luring new investors.

More experienced investors said that appreciation isn’t thegoal: to realize it you have to sell the land. “The capital gain isnice, ” said Albert Kirchner, who is known as Bud and owneda manufacturing company. “We don’t look at the capital gain.We look at it from a productivity standpoint.”

Mr. Kirchner owns 6,000 acres of corn and soybean land inIllinois, an 8,000-acre cattle ranch in Montana and 1,200acres of timberland in Florida. But his benchmark since hestarted investing in land after World War II has remained a4 percent annual return.

At that number and using Agriculture Department estimatesthat the average farmland value in Illinois is $7,800, Mr.Kirchner’s land would be worth $46.8 million, with anannual return of $1,872,000.

But for the person who has bought land recently at auction,getting even 4 percent becomes more challenging. At$12,000 an acre, a 4 percent return is $480. Kevin Casner,who farms 2,400 acres in Carrollton, Mo., with his sonAdam, said the rents in his area ranged from $150 to $450an acre. (Those rents were negotiated before commodityprices started to fall, and will presumably drop.)

A landlord can squeeze a farmer only so far on rent. Mr.Lindstrom said that an acre of his family farm was producing175 bushels of corn, which equals a little more than $740at $4.25 a bushel. But a farmer has some pretty hefty fixedcosts. He said that, per acre, seed is $100, nitrogen is $100,dry fertilizer is $100, taxes are $50, insecticide is $30,chemicals are $50, and cash rent is $300 on average. That is$680 without factoring in the cost of equipment and labor.There is no room to increase the rent in this example by$180 more an acre.

This balance between commodity prices and land valuesand rents can change. It is why all land investors need tohave a long enough time frame. “If you’re wanting to parkmoney for five years, farmland is really not what you shouldbe investing in,” Mr. Duke said. “You need to have that longertermapproach.”

Many farmers and investors fear the past decade could betoo much of a good thing.

“In real terms the gain we’ve seen in farmland values overthe last 10 years are greater than those we saw in the 1970s,”said Professor Gloy of Purdue. In the early 1980s, farmlandprices crashed when interest rates went up and farmerscould not continue to borrow to finance their operations.The two things that could set off a decline are a further dropin commodity prices and higher interest rates.

Matt Ward, one of the owners of Premier Grain Farms inWalker, Iowa, said that a drop of $2 a bushel in the price ofcorn translated to a loss of about $400 an acre. If all 15,000acres he farms were planted evenly, that would translateinto $6 million less in revenue than the land produced lastyear.

Investors who have sharecropping agreements thatdesignate a split in the harvest between farmer and ownerwill see their return reduced immediately. Those who havecash leases are likely to have to negotiate lower rents whenthe lease is renewed.

Another option for an investor has been a variable cashlease. The owner would accept a lower cash rent up frontand negotiate an additional payment if the price of thecommodity or the yield was higher. There is now less chanceof upside potential.

As for interest rates, the fear is that they will rise and thevalue of land will fall. Mr. Lindstrom, the farm owner whoworks for UBS, said there was no way to finance land attoday’s rates of 5 percent and make money. Cash buyers, hesaid, are at risk of losing their principal.

“Could the land go from $10,000 to $15,000 an acre?” hesaid. “Sure, but not today and not with corn at $4.25. I’d besurprised if we don’t go from $10,000 to $8,000 or $7,000.Land has tripled in the last five to six years.”

Still, this was the man who passed on buying land at $3,300an acre because he thought it was overpriced. “We just triedto buy more ground and were willing to go to $7,500 anacre,” Mr. Lindstrom said.

“It went for $10,500. My instincts tell me we’ll buy thatground, and we’ll buy it cheaper.”A version of this article appeared in print on August 17, 2013, on page B4 of the New York edition with the headline: Despite Dropin Commodity Prices, Farmland Values Rise.