Far West

Jan 30, 2009

Far West Farm & Ranch Edition Land market psychology
Are a few no-sale land auctions indicative of a radical new attitude toward farmland investment? Does the hint of deflation encourage buyers to postpone purchases hoping land will be cheaper next year than today? What would it take for farmland to experience a meltdown anywhere close to suburban real estate? Danny Klinefelter, a Texas A&M economist, addressed the topic of a land slowdown in a recent outlook paper on Texas rural land values. According to Klinefelter, whether values actually fall will depend on the length and depth of the recession in the general economy, how much farm income declines, and whether tighter credit and lower farm incomes will push distressed owners to unload their real estate holdings.

“The effect would be compounded if able buyers elected to sit on the sidelines because they believed prices were going to go lower,” Klinefelter said. “The reality is that investor psychology is a very important factor in determining both the upside of bull markets and the downside of bear markets.”

It doesn’t take much to throw things off kilter. Only about a few percent of the land changes hands annually. Overall, Texas rural land values have increased 10 percent to 19 percent annually since 2003, topping out at an average of $2,300 per acre today. That rate may be difficult to sustain under the current scenario.

“If one assumes a continued annual increase of 14.5 percent into the future, the median price of $2,300 per acre would increase to $4,600 by sometime in 2013,” he said. He doubts it will happen. Setbacks in 2009 farm incomes will ration some of the recent land exuberance, although that alone wouldn’t cause any kind of crash on the scale of Florida or Las Vegas housing markets.

Klinefelter worries more that the cost of credit may have an over-sized influence on land values. Keep in mind that foreigners—like Asian governments—own $4 out of every $10 in bonds of the Farm Credit System, the biggest farm real estate lender of all. You don’t want a thing to spook foreign buyers or encourage them to exit en masse. Klinefelter thinks it is inevitable that Americans will have to pay higher interest rates to hold and attract those funds. Remember interest rates on steroids that brought us the land collapse of the 1980s? By the way, don’t think that the Federal Reserve’s proposal to lower 30-year

home mortgage rates to 4.5 percent will spell much relief for farm borrowers. Paul Bruce, treasurer and chief financial officer of Farm Credit Services of Mid- America, points out that the Farm Credit System’s relationship to the Treasury yield curve is very disaggregated.

Any debt other than that explicitly guaranteed by the government (like Fannie Mae and Freddie Mac is now) must pay a premium to investors for increased perceived risk, he points out. So the sad news for farmland borrowers is that long- term rates may head upward before year end—no matter what the government does to bail out home owners. As Klinefelter notes, how high those rates go will play a part in farmland appreciation—or depreciation.

Marica Zarley Taylor, DTN Editor