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January 6, 2011
Powerful Insight for LandOwners
Farmland Fund?
U.S. investment adviser Optima Fund
Management says it
plans to offer a farmland real estate investment trust (REIT) to
investors in three to
four years, reports
Reuters. Optima
Executive Managing
Director Tom Gimbel
reportedly told investors: “There are a lot
of institutional investors who are recognizing the opportunity
here. I think we are at
an inflection point.”
Optima, a $4.5 billion
private investment firm
started investing in
U.S. farmland about
two years ago, Reuters
reports. It intends to
list its offering under
the name of American
Farmland Co. REIT.
Reuters indicates
Gladstone Land Corp,
a REIT focused on agricultural properties,
filed plans in August
with U.S. regulators to
issue an initial public
offering on the Nasdaq
exchange.
Survey Shows Healthy Ag Lifting Rural Midwest Economy
Our next Profit
Briefing Seminars are:
Jan. 19: Effingham, Ill.;
Feb. 1: W. Lafayette, Ind.;
Feb. 2: Peoria, Ill.;
Feb. 8: Lincoln, Neb.;
Feb. 9: Ames, Iowa.
These one-day
events, sponsored by
Pioneer, feature our
outlook for land values,
commodity prices and
Washington agricultural policy. For details or
to sign up, call:
800-772-0023
Lest you think your editors have turned
bearish on land values, we have not. We’re still
bullish and we also have a list of nine reasons to
be bullish on land values. We will publish that
Strong farm income has the Midwest’s rural
economy surging. That’s the message in the latest Rural Mainstreet Index (RMI) conducted by
Creighton University in Omaha, Nebraska.
The index, which ranges from 0 to 100 with 50
considered “growth-neutral,” increased to 55.4 in
December. That’s up from 53.3 in November and
its highest level since January 2008.
The farmland price index, a portion of the
RMI, rose to its highest level since March 2008
and marks the 11th straight month the index has
moved above growth-neutral. It rose in December
to 76.9, up sharply from 68.1 in November.
Creighton University economist Ernie Goss,
who conducts the RMI, said: “Very healthy farm
income is rippling across the rural mainstreet
economy. Businesses heavily dependent on the
farm economy continue to experience very
strong economic conditions.”
Vol. 32 • Iss. 1
The farm equipment sales index likewise
bounced higher with a December reading of
77.8, a record high, up from November’s 68.1.
“This month bankers were asked to name the
biggest threat to the rural mainstreet economy
for 2011,” said Goss. “Over one-third or 35% indicated that a bursting of the farmland price bubble was the number one threat to the economy
for next year.”
The index is based on a survey of banker
attitudes in the ten Midwestern states of
Colorado, Illinois, Iowa, Kansas, Minnesota,
Missouri, Nebraska, North Dakota, South
Dakota, and Wyoming.
It represents an early snapshot of the economy of rural, agriculturally and energy-dependent
portions of the nation. The RMI focuses on
approximately 200 rural communities with an
average population of 1,300.
So, What Could Go Wrong?
In the midst of some of the strongest demand for
quality cropland seen in recent decades, it’s
worth taking a look at what factors could bring
this strength to an abrupt end.
That’s just what we’ve done with our special
focus feature inside this issue. Here we list nine
reasons to be bearish on land values.
The story is part of a larger summary written
as a special report for Pro Farmer Members.
LandOwner readers will recognize much of the
special report’s content as material covered in
LandOwner. But the way we have packaged it
may provide fresh insight for you.
list in a future issue. You can review our lists of
nine reasons — both bullish and bearish — and
come to your own conclusion.
Bottom line: We have two main concerns
about how long the current strength in demand
for land will last. The first is long-term interest
rates and the second is farm income. The outlook for both appears positive for the near term.
But when farm income slips and interest rates
rise, demand for farmland will cool sharply.
How soon that will be is anybody’s guess, but
it does not appear that either of these factors will
be a problem any time soon.
If you would like to receive the Pro Farmer
special report, just send us an email at: [email protected]. Please note: the special
report is available free to LandOwner subscribers but via email only.
USDA Projects Strong Grain, Oilseed And Cotton Prices
USDA economists continue to project strong
grain, oilseed and cotton prices will persist in
2011. That’s based on USDA’s look at supply and
demand fundamentals for these crops issued in
mid-December.
For corn, USDA projects on-farm prices will
average from $4.80 per bu. to $5.60 per bu. for
the 2010 crop — up from the $3.55 average
recorded for the 2009 crop and $4.06 average
pocketed for the 2008 crop.
For soybeans, USDA projects farmers will
receive an average of $10.70 to $12.20 per bu. for
the 2010 crop. That compares to $9.59 for the
2009 crop and $9.97 for the 2008 crop.
For wheat, USDA calls for an on-farm average
of $5.30 to $5.70 for the 2010 crop. That’s up
from $4.87 for the 2009 crop and $6.78 for 2008.
USDA projects 2010-crop cotton prices will
average 76¢ to 86¢ per lb., compared to 62.9¢ for
the 2009 crop and 47.8¢ for the 2008 crop.
9 Reasons To Be Bearish On Farmland
This is reprinted (with updates) from the Pro Farmer
Annual Land Report, published earlier this fall. Look for our
9 Reasons To Be Bullish On Land in an upcoming issue.
rates will rise — eventually. With interest
1be Interest
rates at historic lows, the eventual long-term trend can
in only one direction — up. When that happens, business costs for operating farmers will rise. That will make
it more difficult for the number one buyers of farmland
— farmers — to generate the cash for land purchases.
In addition, investors who bought farmland because of
poor returns on financial instruments will be tempted to
rethink their investments when yields on certificates of
deposits, for instance, rise to attractive levels.
Recent buyers of farmland may also find it difficult to
service debt on purchases if interest rates rise and they do
not have their mortgage rate locked in for the long-term
and/or do not have enough other equity on their financial
statement.
Farm program safety net uncertainty is another
3ments
cause for concern. Cuts to federal farm program payare a major risk for land values. That’s especially
true for areas that have minimal buying interest for nonagricultural use (other than hunting) such as the western
two-thirds of Oklahoma, Kansas, Nebraska, South Dakota
and North Dakota. Given the massive size of the federal
budget deficit (estimated at nearly $1.3 trillion), talks of
potential cuts in federal farm program payments have
surfaced. Cuts, if ordered, would prove negative to land
values.
Obviously, it is difficult to estimate how much a cut in
federal farm program payments would impact land values.
But Kansas State Ag Economists Terry Kastens and
Kevin Dhuyvetter have attempted to put a number on the
potential impact.
Percent 2009 Land Value From
Government Farm Program Payments
at near-record high levels. The run up in
2wellPrices
land values the past two decades has carried land prices
above their previous peak, which was posted in the
early 1980s.
The chart below is for Iowa, but, it is typical of the price
pattern seen in many Midwestern states. The data in the
chart is from the annual survey conducted by Iowa State
University. It shows an acre of good Iowa cropland reached
$5,064 an acre at the end of 2010, up $693 an acre from
2009 and a 16% jump compared to a year earlier.
Market observers believe a sharp run up to record levels normally is followed by a major correction. They don’t
view the setback in late 2008 and early 2009 as a major
correction. They worry that a correction in land values is
still ahead.
$4,371
Kastens and Dhuyvetter, Kansas State University
In their analysis, they looked at cash rents and land
values from 1951 to 1972 to calculate what they termed
the agricultural value of farmland. They then applied
those results to 2009 cash rents to determine what current land values would have been in a similar “ag-only”
environment. They also looked at the average relationship
between government payments and cropland cash rents.
That relationship is shown in the figures above.
It shows the substantial contribution of federal farm
program payments to southern agriculture and in the
Great Plains. They suggest another way to look at the
percentages in the figures above is to view each state’s
percentage figure as the percent cash rents would fall if
federal farm program payments were reduced to zero.
The impact is remarkable. And if you apply a 4% or 5% cap
rate on the lost cash rent income, the impact on potential
LandOwner is published twice a month. © Copyright 2011 by Professional Farmers of America®, Inc., 6612 Chancellor Drive, Cedar Falls, Iowa 50613-9985
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LANDOWNER 2 / January 6, 2011
9 Reasons To Be Bearish On Farmland (cont.)
land value is also quite remarkable. While there is no credible discussion of cutting farm program payments to zero,
the impact of any decrease in payments could prove negative on land values.
The amount of actual farm income support offered by
the current farm bill is also a major question mark. The
bill left price support levels basically unchanged from the
previous farm bill. But production costs have moved
sharply higher since. Growers worry a decline in grain
and soybean prices to farm program price support levels
will mean significant operating losses. That would prove to
be a major negative on land demand if that were to occur.
weapon in its battle to lower energy prices. Investment
capital poured into new construction and corn-hungry
plants sprung up throughout the Midwest. The demand
from this new industry thrust corn prices higher, which
sent land prices higher. Then the break in crude oil and
corn prices in 2008 burst the euphoria along with several
ethanol companies. Profitability returned in 2009-2010 but
the rise in corn prices in late 2010 stretched operating
margins thin.
Whether this is the end of the ethanol “boom” or is
simply a correction is a matter of debate. But a contraction
in ethanol industry demand for corn would have a dampening impact on land demand.
investment returns. Even though cash
4keptDeclining
Carbon legislative/regulator y uncertainty. The
rental rates have risen, the rate of that increase has not
pace with the rapid run up in land values. According 8uncertainty over climate change enforcement from the
to USDA, the annual return to an average acre of cropland EPA and any potential “cap-and-trade” legislation may
was 4.7% in 2000. By the start of 2010, that return was 3.8%. prove an important damper on land demand long-term.
A similar situation occurred just prior to the collapse in Landowners worry whatever EPA decrees will be negative
for agriculture. Same can be said for any potential “capland values in the early 1980s.
and-trade” legislation. A bill has passed the House, but its
Changes in tax policy. Congress passed an extension fate in the Senate is uncertain. What is known about the
of the income and capital gains tax cuts passed in the House bill is not seen as positive for agriculture and, thus,
wake of the 9/11 terrorist attack. That spared U.S. citizens a negative on land demand.
from the largest tax increase ever levied in history.
However, potential tax increases from both state and local
Financial stress in livestock industries. The beef,
governments to shore up gapping deficits could prove a
pork, dairy and poultry sectors all showed recoveries
major drag on the economy and extend the reduced in 2010 after facing severe financial stress in 2007-2009,
demand for recreational land.
but the sharp rise in corn (feed) prices at year end threatens the rebound. If domestic feed demand falls, some of
Massive budget deficit. The Congressional Budget the support for corn prices — thus land values — will
Office (CBO) estimates the 2010 fiscal year federal weaken as well.
budget deficit will be slightly less than $1.3 trilFederal Budget Deficit Explodes
Billions $
lion, which follows 2009’s staggering $1.4 trillion
deficit. The 2010 deficit is equal to nearly 9% of the
nation’s gross domestic product (GDP), following
2009’s 10% of GDP. The 2010 budget deficit is the
second highest (2009’s deficit was the highest)
since 1945.
A deficit this large cannot be ignored. While
what will come from the next Congress is still
unkown, there’s been much talk of cutting the defiFY 2009 = $1.4 Trillion
cit by reducing spending. While positive in the
long run, the immediate impact from reduced
spending could prove a damper on the economy.
It’s not just a federal issue. State, county and
Congressional Budget Office
Fiscal Years
other local budgets are all under pressure, which is
already prompting tax increases at each level. The
cumulative effect of these increases could prove very Look for our 9 Reasons To Be Bullish On Farmland in an
damaging for the economy and could pressure land upcoming issue of LandOwner. In addition, subscribers
to LandOwner may receive the full 24-page report for free
demand.
via email. (Sorry, there is a charge for mailing the hardEthanol hype is gone. The industry became a Wall copy.) Send your request to: [email protected]
Street darling as the government identified it as a prime or call 800-772-0023.
5
9
6
7
LANDOWNER 3 / January 6, 2011
MINNESOTA: OTTERTAIL CO. —
DECEMBER 7: 148 acres 4.5
miles southwest of Pelican
Rapids; 100 acres cropland; PI
80; 15-acre tree farm; 7.3-acre
farmstead; $412,000 total for
141 acres or about $2,922 per
deeded acre. Farmstead sold for
$27,000. Terry Skjerseth, Pifer’s
Auction & Realty, Moorhead,
877-700-4099.
ILLINOIS: DEWITT COUNTY —
DECEMBER 2: 117 acres 14 miles
southeast of Bloomington; all tillable; PI 137.4; no buildings;
$7,950 per acre. Wally Yoder,
Soy Capital Ag Services,
Bloomington, 800-532-LAND.
$
Recent sales
reported to...
Here’s a listing of recent sales reported to us by real estate brokers and auctioneers across the country. If you have recent sales you’d like to
share, call us at 319-277-1278 or e-mail us at [email protected].
NEBRASKA: DODGE COUNTY — DECEMBER 17: 73.5 acres northwest of
Fremont; 57.1 acres tillable; 12.5 acres CRP in two contracts at average rate of
$84 per acre, expiring 2011 and 2016; $5,300 per acre. Local farmer buyer.
Tom Sunderman, AgriSun Land Management, Inc., Fremont, 402-727-7100.
ILLINOIS: GREENE COUNTY — DECEMBER 17: 521 acres north of Hillview;
Tract 1: 222 acres; 219 acres tillable; river bottom land; $9,255 per acre. Tract
2: 150 acres; 90 acres tillable; $5,000 per acre. Tract 3: 143 acres woodland
with two modest homes; $3,750 per acre. Allan Worrell, AFM, ALC, WorrellLeka Land Services, Jacksonville, 217-245-1618.
KANSAS: THOMAS COUNTY —
NOVEMBER 23: 480 acres 11 miles
south of Colby; 468 acres tillable;
pivot irrigation; 326.5 corn base
acres with 132 bu. yield; 320
acres sold for $3,350 per acre
and 160 acres sold for $3,075 per
acre. Farm & Ranch Realty, Inc.,
Colby, 785-462-3904.
OKLAHOMA: NOBLE COUNTY —
NOVEMBER 20: 80 acres north of
Lucien; 30 acres cropland; $1,400
per acre. Half of minerals sold with
land. Wiggins Auctioneers, LLC,
Enid, 580-233-3066.
ILLINOIS: KNOX COUNTY —
NOVEMBER 16: 64.7 acres near
Galesburg airport; Tract 1: 39.7
acres; 34.3 acres tillable; $7,800
per acre. Tract 2: 25 acres; 16
acres tillable; $5,350 per acre.
Both purchased by local farmers.
Van Adkisson Auction Service
LLC, Roseville, 309-426-2000.
MINNESOTA: KANDIYOHI CO. —
NOVEMBER 2: 149.5 acres 6
miles north of Pennock along
Mamre Lake; mostly all tillable;
PI 87.9; $4,475 per acre and
$4,743.50 per acre with 6% buyer’s premium. LaDon Henslin,
Henslin Auctions, Inc., Bird
Island, 320-365-4120.
IOWA: SIOUX COUNTY —
SEPTEMBER 21: 80 acres north of
Hospers; 72.5 acres tillable;
CSR 68.85 (64.8 county average); $8,900 per acre. Klaassen
Realty, Sibley, 712-754-3500.
IOWA: STORY COUNTY — DECEMBER 16: 249.6 acres 3 miles south of Nevada;
Tract 1: 60 acres; 58.9 acres tillable; CSR 85.3 (77.6 county average); $8,650
per acre. Tract 2: 67.6 acres; 63.4 acres tillable; CSR 87.6; $8,300 per acre.
Tract 3: 82 acres; 63.3 acres tillable; CSR 82.1; $5,825 per acre. Tract 4: 40
acres; 22.5 acres tillable; CSR 82.4; $5,550 per acre. Jerry Lage, Hertz Real
Estate Services, Nevada, 515-382-1500.
MINNESOTA: FREEBORN COUNTY — DECEMBER 16: 134.3 acres 6 miles west of
Albert Lea; 127 acres tillable; 52.2 corn base acres, 114 bu. direct yield; 74.9
soybean base acres, 35 bu. yield; $5,500 per acre. Lowell Gabriel, Farmers
National Company, Alden, 507-383-0295.
INDIANA: ALLEN COUNTY — DECEMBER 16: 60 acres west of Woodburn; mostly all tillable; recently leveled; $7,096 per acre. Jerry Ehle, Schrader Real
Estate & Auction Co., New Haven, 866-340-0445.
MISSOURI: CARROLL COUNTY — DECEMBER 14: 227 acres half mile north of
Bosworth; 203 acres tillable; gentle slopes, waterways and terraces; FSA direct
corn yield of 96 bu. per acre, 25 bu. for soybeans and 46 bu. wheat; $2,467
per acre. Barnes Realty, Mound City, 660-442-3177.
INDIANA: CLINTON COUNTY — DECEMBER 13: 146 acres north of Burlington;
71 acres tillable; 72 acres rolling woodland; building site; $2,055 per acre. A.
J. Jordan, Halderman Real Estate Services, Peru, 317-697-3086.
IOWA: HARDIN COUNTY — DECEMBER 10: 63 acres southeast of Iowa Falls;
56.4 acres tillable; CSR 83.4 on 59 acres (75.9 county average); 4-acre improved
acreage; $7,225 per acre. Jeffrey Obrecht, Farmers National Company, Iowa
Falls, 641-648-5065.
KANSAS: GRAHAM COUNTY — DECEMBER 9: 480 acres northwest of Hill City;
471.6 acres CRP at $40.89 and $43.64 per acre expiring in 2025; $925 per acre.
J. D. Hininger, Farm & Ranch Realty, Inc., Colby, 800-247-7863.
IOWA: BENTON COUNTY — DECEMBER 9: 120 acres 1 mile north of Urbana;
116 acres tillable; CSR 51.5 (72.8 county average); small amount of trees in one
corner; $4,300 per acre. Purchased by current tenant. Bret Barner, Barner
Realty & Auction, Anamosa, 319-462-4100.
LANDOWNER 4 / January 6, 2011