California land values continue to rise, but will the trend last?

News
Aug 5, 2011
by WLJ

A big question among California farmers and ranchers these days is whether this is a good time to sell the farm or, on the flip side, if this is a good time to buy a farm or ranch.

Experts on land values say these two questions don’t have simple answers. Each situation is different, requiring potential buyers and sellers to weigh their options carefully.

The economic downturn that has slammed the residential and commercial real estate markets over the past three years has not spilled over to agricultural properties. A recent report by Rabobank points out that in the past two decades, agricultural land has increased in value by 20 percent to 70 percent, depending on geography.

The three main factors contributing to this growth, the bank said, are high commodity prices, low interest rates, and limited supply of available agricultural land.

Land in the Midwest and Corn Belt had the greatest growth in value, the report said, while land with more diversified production, such as California, had more modest value appreciation.

“California has such diversity and, generally speaking, our irrigated farmland brings quite a bit more than farmland in other areas of the country,” said David Gracia, vice president and manager of the agricultural appraiser department for Citizens Business Bank in Visalia.

“California farmland values have been staying pretty level over the past year. It is kind of difficult to compare because we have so many different commodities out here that are not grown in other parts of the country,” said Gracia, who is also president of the California chapter of the American Society of Farm Managers and Rural Appraisers.

Gracia added that the recession that hit the residential and commercial real estate markets has not been as dramatic when it comes to farmland. There were some exceptions that did feel the downturn, he said, particularly small, hobby-type farms with rural residences on them.

“But when you are looking at general agricultural production ground, the supply is pretty limited. There is only so much land in agriculture,” he said.

The point about a limited supply of land was also made by Scott Stone, Yolo County rancher and real estate broker, who said that this is actually a good time for both buyers and sellers of farmland.

“They aren’t making any more farms or ranches. People have got to eat. The demand for food is going to continue to increase and this will put more pressure on the existing farms and ranches that are out there,” Stone said. “People are starting to move money out of other investments and putting that money into farm ground because of the stability and steady growth as an investment.”

Vernon Crowder, senior vice president and agricultural economist for Rabobank’s Food & Agribusiness Research and Advisory group, noted one impact of the housing recession on farmland.

“Urban expansion is a big factor in California, particularly near urban areas. When these value surveys are taken about agricultural land, they are surveying all farmers, and that includes farmers who are next door to communities that are expanding. So when people answer the question of what their land is worth, they are giving their perceived value,” Crowder said. “When the market was hot for development, people had a very different idea of what the value was.”

The farmland experts also agreed that another factor that directly impacts farmland values is the prices earned for the commodities being produced on that property.

“Farmland is tied for the most part to the economics of the commodities,” Gracia said.

Farming in the Midwest is more homogeneous, with either livestock production or field crops such as wheat, corn and soybeans, Crowder said.

“Here in California, a grower may have nut crops that are all going up in value, and some of the fruits like strawberry ground or lemon ground is going up. But on the other hand, stone fruit may be going no place. Grazing land has probably lost value, especially in the area of rural homes,” he said.

Another factor is water availability, which plays a critical role in California land values. Water is extremely important both in looking at repayment ability of operating land and in the overall value of the land, Gracia said.

Crowder said open ground with good soil, “if it has a couple of alternatives for water, goes for a premium. If there is only one water source, it will be reflected in the lower value.

So water is key. We are seeing properties that have gotten valued up because they could sell water to other areas.”

Part of the attraction to long-term investments such as agriculture has been that interest rates are unusually low, Crowder said.

“That has been a major driver, so when that changes—and it will change— that could have a big impact on ag land values.

And that is one of the reasons we fully expect there to be a modest contraction in values someplace in three to seven years.”

So back to the original question: Is this a good time to buy or sell a farm or ranch?

“If you happen to get property that has a desir able commodity on it, I would say that now may be a good time to buy,” Gracia said. “On the negative side of that, you are going to have to come up with a substantial down payment. Banks now require more percentage down.

“For specific commodities, if you have nut crops and so forth that demand premiums right now, this might be a good time to buy. If you are in the dairy industry that got nailed in 2009 and is still trying to dig itself out, it might be prudent to hold off if you are contemplating selling. Wait until the market gets better and participants get more healthy.”

Crowder responded that it is an individual decision that every farmer needs to make.

“I wouldn’t dare to recommend a course of action, but if anyone is considering a significant reduction in farmland values, I would suggest that it is highly unlikely. On the other

hand, I would remind people that things do go up and down. Interest rates aren’t always going to stay low. The dollar isn’t always going to stay depreciated, so that is why I would say it is very reasonable to expect a very modest downward adjustment in farmland values in the next three to seven years.”

And Stone added: “One of the nice things about holding a piece of ag land is that at the end of the day, whether it is in good times or bad times, you still own that piece of ground. It is a producing asset and one that you can turn into a more efficient asset. You can invest money to change uses to derive different types of agricultural income from that property. There aren’t too many other investments where you have the ability to do that and have that amount of control on your asset.” — California Farm Bureau Federation

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