Drought took its toll on Southwest market

Jan 13, 2014

— Improved conditions, quality hopeful for the future

Times have been tough in the heart of classic cowboy country these past few years. The Southwest has seen some of the worst drought it’s experienced in ages in 2011-2013. Drought and its accompanying friend, fire, has taken a toll on ag real estate and pasture values. But as the drought lessens and abates, and hints of rebuilding the cow herd emerge, there is a spark of hopeful optimism in the future.

By the numbers

According to USDA’s National Agricultural Statistics Services most recent Land Values report (August, 2013), changes in pasture values in the Southwest between 2012-2013 were almost non-existent. Both New Mexico and Texas saw no change in their pasture values—at $350 per acre and $1,560/acre respectively—and Arizona saw too few sale reports to publish a change.

Oklahoma was the spectacular outlier in terms of changes in pasture land values for the Southwest. Compared to the national average increase of 4.3 percent, Oklahoma pasture values jumped 15.7 percent to $1,330/acre. This was the largest percentile increase for any state outside of the Cornbelt and still quite respectable when compared across the board.

Changes in farm real estate values were better than pasture values, but well below the national average of up 9.4 percent. Arizona’s farm real estate values increased 5.6 percent to an average of $3,800/acre. New Mexico’s declined 1.8 percent to $550/acre. Texas’ increased ever so slightly at up 0.6 percent with an average of $1,810/acre. And Oklahoma was again the clear winner in terms of gains with a 7.4 percent increase in value to $1,590/acre.

Word on the ground

Averaged numbers aren’t everything in the reality of selling unique properties to unique buyers, and data compiled mid-2013 on the changes seen in 2012-2013 don’t hint at anything that has happened more recently. For that it takes a personal perspective. Among the Southwestern realtors of ag and cattle property WLJ spoke to, recent market moves have made for cautious optimism in 2014.

“The ranch market is really strong,” said Nancy Belt of Stockmen’s Realty, who mostly works with cattle ranches and farms in the Arizona and New Mexico markets. She added that she has heard of a lot of interest in farms lately, specifically for pistachios and pecans.

When asked why the change from the recent past she was unsure, but speculated it had something to do with pent-up buying interest from farmers and ranchers stymied the past few years by poor conditions and difficult financial situations.

“Ranchers have been doing so much with so little for so long that they won’t sit on their hands for very long.”

“It all depends on what type of real estate,” said Dick Bretz of Eslabon Properties in a more conservative response to how the market is doing in his area. He explained that the vast majority of what he sells is feedyards in Texas and that the market for feedyards has been tough.

George Clift, of Clift Land Brokers and President of the Realtor’s Land Institute, also had a “type” caveat to his prognosis on the area’s markets. He emphasized the need to look at specific offerings when considering the state of the market.

“There are a lot of ranches that are in tough shape because of the drought. The ranches that are in good shape are in short supply,” he said, noting that he specializes in farms and ranches mostly in Texas. “The really good farms are bringing good money. There’s always a market for good farms.”

He said good management of any land has made for attractive properties that sell well, but that the drought has been hard on farmers and ranchers in the Southwest.

“It’s been brutal. People don’t know how tough it’s been.”

Another impact of the extreme drought in the Southwest has been the year-over-year decline in the cow herd.

“U.S. cow numbers keep going down,” said Bretz, citing the low level of the national cow herd not seen since the early 1950s. “And if you don’t have a cow, you don’t have a calf, and if you don’t have a calf, then you don’t need a feed yard.”

He estimated that the average U.S. feedlot capacity exceeds current needs by about 30 percent and noted that some very sizable older feedlots are being torn down.

Despite this, however, there is still some interest in repurposing Southwestern feedlots.

Midwestern dairies— hemmed in from expanding either by existing infrastructure or by stricter state regulations—have bought up a number of beef feedlots and have been using them to develop dairy heifers. In that way, tighter regulations in other states are making for opportunities for the freer Southwest.

Buyers, sellers and challenges

One very hopeful sign was that, when it comes to farms and ranches, farmers and ranchers are selling and ranchers are buying. Belt was quick to point out that cattlemen are buying cattle ranches in the Southwest. Not recreationalists or investors; cattlemen. That is indeed a hopeful situation.

“A lot of what I’m seeing is little guys,” she added, noting that a few of her clients are young people trying to buy their first ranch or farm.

Clift also noted that buyers lately have been farmers and ranchers, but that what he’s seen has been overwhelmingly expansion rather than start-up purchasing.

“People that are buying are people that are expanding their operation. They’re families where the son’s coming back home and wanting to get into the business.”

He also noted that the sellers are often those producers who, due to age, are retiring.

“The typical seller is going to be a seller who is exiting the business.”

When coupled with the detail that current producers are the ones buying what is being offered, the outlook looks good for agricultural land remaining agricultural.

One of the things that allows for this sort of ag-to-ag turnover of properties is the equity that has been built up in farms and ranches in the recent past.

“The financial health of these farms is much better than they were several years ago,” noted Clift.

Despite the financial health of the farms themselves, financials are still one of the biggest challenges to the Southwestern real estate market in terms of properties actually selling.

“The down payment and getting approved through the banks are big issues,” said Belt. “FSA has had money available for loans, but their criteria are hard to work with.”

She said that she encourages her clients to do seller’s financing. It shifts much of the risk onto the seller, but allows for more flexibility in agreements between the buyer and seller such as annual rather than monthly payments. The interest rates are not always what one might get at a bank, but seller financing is often far more obtainable than bank loans.

Belt pointed out regrettably that the financial burden is especially high for young prospective buyers.

“Young buyers are having a really hard time. I think that’s sad because there’s an apathy that could develop.”

Clift agreed that the financial side of the market is a common problem, particularly for young buyers even with agricultural roots and equity in things like equipment. For new people entering the business, he said it was almost cost prohibitive, given how high-capital the agricultural world is.

Mother Nature’s whims and the future

As mentioned, a lot about the Southwest real estate market in 2013 had its roots in the year-on-year drought which hit the area hard. At the beginning of 2012’s “water year”—which began Sept. 27, 2011—11.3 percent of the contiguous U.S. was in the highest level of drought, with almost all of that showing up in the Southwest. At that time, 85.75 percent of Texas was consumed with this highest level of drought. Overall, 43.55 percent of the country was in some form of drought or another.

Fast forward to the first week of 2012 (see Table 1 on page 9), and more of the country was in some form of drought, but the severity had declined. Texas still saw the majority of the worst conditions. By the first week of 2013, more of the country was in drought (72.78 percent) of some kind, and the intensity had increased though the affected areas moved north a bit, centering on Oklahoma, Kansas and Nebraska.

As of the most recent version of the U.S. Drought Monitor (released Jan. 9), 53.36 percent of the country is in some form of drought, but only 0.37 percent of the country is in the highest level of drought. These areas are restricted to four small areas located in north Texas, south Oklahoma, southeastern Colorado, and Nevada. The greatest areas of severe drought have now shifted to the California/Nevada area where almost all is in some form of drought, most of it in the second or third most severe levels of drought.

“We’re going to have lots of opportunities to make profits,” said Clift. “But it will hinge on Mother Nature giving us a break, but I don’t have that magic bullet.”

What a world it would be if one could know the future of the weather. Though it is impossible to know for sure, the National Weather Service makes an effort at prediction. On the temperature front, it projects higher than normal temperatures in the South and Southwest for most all of 2014.

Its predictions of precipitation levels are less specific and more conservative. Through the April/May/June period of 2014, it predicts lower than normal precipitation in areas of the Southwest, though at lower intensities than the past. Similarly, the Farmer’s Almanac anticipates an average of lower than normal rainfall with regional pockets and months that may likely buck the overall trend.

But the future is not bereft of possibilities. Bretz, even as he talked about the tough market facing feedlots where some are even being torn down, saw some silver lining to the current market. Looking to the future, with its likelihood of diminished feedlot infrastructure and growing cow herd, he said, “Feedyard prices will skyrocket with a lack of supply and things will get good again.”

Belt also was optimistic about the future, saying she hopes to see the recent strong ranch market in her area continue.

“I’m hoping that the trend continues. I don’t want to see it go back to what it was in 2005. I want to see it stabilize and continue its steady path.”

Clift said that while opportunities can go hand-in-hand with the weather, producers can also make their own opportunities.

“Prudent management can still make a profit regardless of if you are in the cattle business or crops,” he said, pointing out the new and advancing technology available, be it improved genetics on the cattle or crop side, better tilling or planting methods, or improved watering practices.

“All those things are opportunities.” — Kerry Halladay, WLJ Editor