No crash landing

Feb 21, 2014
by DTN

—AgriBank sees land moderation

Farmland values in some states are beginning to show signs of stress cracks, but one of the nation’s largest farm mortgage holders doubts there’s a crash landing ahead.

AgriBank, the Farm Credit System district bank that sources funds for Farm Credit Associations covering half of the nation’s cropland, still sees wide disparities in farmland appreciation, depending on the 15 states within its territory. Between 2012 and 2013, USDA reported North Dakota values soared 41 percent, thanks to the gold rush from the Bakken oil fields while Wisconsin notched only 2 percent gains and Wyoming actually lost about 3 percent.

Last month, one of AgriBank’s associations— Omaha-based Farm Credit of America—reported Iowa land values tumbled about 3 percent in the last half of 2013 while South Dakota rose 7 percent in the same six-month period. Meanwhile, the number of auction “no-sales” more than doubled to about 7 percent in 2013, noted Farm Credit of America’s Senior Vice President Jim Knuth at the recent Iowa Land Investment Expo.

That kind of activity is “healthy and normal,” he said. “The land market is adjusting to the transition from an accelerating market to a stable market,” with a larger gap between some seller and buyer expectations.

Last week three Midwest Federal Reserve districts issued year-end 2013 surveys showing an overall slowdown in farmland appreciation, but some regions continued to notch gains while others hit negative numbers.

“Whenever you have a turnaround in commodity prices, you have a period whereby some areas experience upward movement and some downward movement,” Jeff Swanhorst, Executive Vice President and Chief Credit Officer for the St. Paul-based AgriBank, told DTN. “That just shows we’re in a state of change right now.”

While some economists have been preoccupied with the impact of interest rates on land markets, AgriBank thinks it could take two or three years for 10-year Treasuries to bounce back to 4 percent levels.

A recent AgriBank sensitivity analysis concluded that leaner farm incomes are likely to exert much more immediate influence on land values than higher interest rates will over the next few years.

Farmers already are downsizing their income expectations, which will ultimately affect cash rents and what they would be willing to pay to own land. USDA’s season-average corn price projections have fallen from a high of $6.89 per bushel in 2012-13 to $4.50 per bushel for the current marketing year. AgriBank expects an extended era of lower prices, dropping to $4.12 in 2014-15, then gradually increasing to $4.33 by 2017. All of those levels leave little margin for error in farm budgets.

In an extreme scenario, AgriBank found a 50 percent decline in either net cash income or net farm income would result in about a 33 percent decline in cropland values. Or for every $1 decline in corn prices, average AgriBank district cropland values would drop by $298 per acre, and for every 1 percent increase in the 10-year Treasury rate, average cropland values would decline by an average of $357 per acre.

In a more moderate scenario, where season-average corn prices hold at $4.50 per bushel and interest rates remained steady, overall land values should decline only about 10-12 percent.

Even if farm real estate faced an abrupt 30 percent correction, Swanhorst doubts the fallout would be as devastating as the 1980s debt crisis or the 2000s housing bubble. First of all, farmers remain the primary buyers, not speculators: Iowa farm operators purchased 81 percent of properties sold in 2013, up from 77 percent in 2009. Most buyers also are paying cash for new purchases, but when they borrow, they contribute sizable down payments. At Farm Credit of America, which services 60,000 operators in four states, the average debtto-collateral ratio is 43 percent.

Several high-profile “alpha” farms with histories of high cash rent may have folded in recent years, but the old stereotypical tight-wad farmers of yesteryear likely will prevail in the next cycle. Those who own most of their land free and clear can keep breakevens at $2.50 per bushel to $3 per bushel corn, not the $4 or $5 average for those with a mix of high-priced $300-400 rental ground.

Swanhorst agrees there’s a huge range in production cost, largely dependent on land payments or rents, fertilizer and seed.

“We are in the beginning of a major change in corn prices and net farm incomes,” he said. “Those involved in crop farming will need to look at all expenses ... to makes sure they are as efficient as they can be.”

But one of the real positives “is that most farmers are going into this cycle with strong balance sheets, liquidity and working capital,” he added. “That will allow them the financial wherewithal to adjust to the new realities.” — Marcia Zarley Taylor, DTN