Farmland Values Cooling Off

It's upon us!  That long stretch of a dramatic rise in land values is finally slowing down.  According to the Federal Reserve Bank of Kansas City land in Nebraska, Kansas, Wyoming, Montana, Colorado, Oklahoma and Western Missouri have all cooled off.  This could trigger what I believe is a farmland gold rush for buyers. 

How's That? 

Many farmers have been holding on to their land in hopes to selling it at it's highest value well beyond the normal age a farmer does.  Well, those values have peaked, leveled out and are now starting to come back down a bit.  As of now, there are fewer farms for sale on the market.  I expect a dramatic increase here quickly with farms selling at a dramatic pace.  So if you're an investor looking to get in, now is an excellent time to be brushing up and learning about the cropland business.

Where Should I Go?

There are many websites you can go to to learn.  My favorite is Brownfield Ag News.  This is where you can keep up with all things agricultural.  I especially like it has a spot where the commodity prices are constantly up to date.  You can also download and app for your smart phone as well.

Another good place is Farmers National Company.  Here is a one stop shop for all things agricultural and they do an excellent job spelling things out in laymen's terms to better help you understand.  Also, they are the largest farm management company in the United States.  So, find a local manager in your area using there site and sit down and talk with him.  That the best way to learn.

And then finally, talk to a local real estate agent to help you look and make decisions.  Farmers National Company also does this.  Depending on where you're looking I highly suggest Farmers National Kansas City.  If anything, they can help point you in the right direction.

What About a Bubble?

This is a common fear people have.  While it is a possibility it's highly unlikely.  Most farms were bought by cash buyers.  It was rare someone bought a farm with loaned money.  The reason is farmland prices always go up and rarely fall back.  Now we are experiencing a slow down and may experience a lowering in price, but that won't be the trend for long.  As a matter of fact, what will most likely happen is instead of farm prices rising at a clip of 25% per year.  They are more likely to rise at 5% per year.  So there won't be any collapse like the housing market which was primarily driven by debt.

If you wish to read the complete survey by the Federal Reserve Bank of Kansas City just click on the link below.

Fed Reserve of KC Survey

Piecing Together a Commodity Marketing Plan

What Affects The Market?

A handful of things really affect the commodity market.  

USDA Reports

USDA reports can really dictate what the next year or so could look like for the farming business.

Foreign Economies

For example, what happens in say Greece with all their economic woes can affect commodities we export out.  Also, China is a big exporter for us.  If that economy falls apart we would feel it as well.

Managed Commodity Funds

The market will react to these as well.  These are really where we see the numbers and how the prices in the market will be adjusted.

World Events

To really truly hurt the farming market a global event has to take place.  Such as an embargo or a third world war.  But little ones like economic woes of Europe can be felt here.

Weather

A few years ago we went through a pretty long drought.  It was actually getting scary.  But like most things the weather came back to the median.  However, that drought really affected prices.  Drove them through the roof.  So weather is something to keep an eye on when thinking about the market.

Solving The Leasing Puzzle

Leasing Formula

How do you go about putting a farm lease together?  Start with these four questions.  What are the commodity prices?  Will improvements need to be made?  How productive is the land?  Is there a demand for you land?

Other Factors

You need to get an idea of what the USDA net farm income would be.  That would give you a jump start on where to begin negotiating.  And lately they've been great.  In 2011 we had the second best year for record income.  And 2012 was the third best year in record income.  Farmers generally have cash on hand which is one of the reasons most deals are cash deals and not debt driven.  You no longer have to worry about a bubble for the cropland market.  Debt to asset ratio is 10.3%.

Weather Patterns

You know that old saying in housing and commercial real estate.  What's the three most important things?  Location, location, location.  Farmland falls right into that as well.  Depending on where you were located, yields from the drought were reduced from 0% to 80%.  So if you live in an area with warm days, cool nights and steady rainfall patterns, you're looking good.  Ever wonder why Iowa is the hot bed for cropland?  It's in the sweet spot of climate and rain fall.  No other state has what Iowa has.  However, this is also the reason Iowa land is by far the most expensive in the United States.

Crop Insurance

The prices in the fall of 2012 will dictate what the prices of 2013 would be should a farmer have to use insurance.  For example, in 2012 corn was $7.50, soybeans were $15.39 and wheat was $8.78.  2013 farm finances are looking strong.  Crop Revenue Protection for 2013 is at profitable levels again.

What's Changed?

Late summer 2013 prices came in looking good.  Cash corn was $6.70 and new crop corn was $4.50.  Cash soybeans $13.30 and new crop soybeans was $11.60.  Cash wheat was $7.00.  This shows despite the rough last couple years farming is still very profitable.  Insurance prices as of July 24th of this year ar $4.80 and $12.55.  Farmland values are very strong and continue to rise as well as the return of investment.  Farmer's are sitting in a great strong cash position.  

A Farm Gold Rush Is Coming!

Farmers Are Getting Older

Are farmers getting older?  Yes they are.  Why is that?  It's not what you think.  Farmers are getting older but it's not because they have to keep working.  They are sitting on a gold mine and they know it.  Farmers are getting older because they see the prices skyrocketing.  Analysis predict at some point prices will drop back to normal rates.  Instead of raising 20% each year, in the next couple of years we should see prices raise around 5% each year.

So, what does this have to do with farmers getting older?  They see the same thing we do.  Many farmers are waiting to see where this ends.  They want to cash out at the highest possible rate they can get.  And that is coming soon.  A farm gold rush may be upon us in the next few years.  

What will that do to the market?  It should become highly competitive.  Which could spell good news for buyers.  When there is a lot of inventory in the market, sellers will compete for buyers.  That day may be coming soon.

Sounds Like a Bubble

Now I understand that this sounds familiar to some of you.  The idea of more inventory than buyers sounds a lot like the housing market bubble burst.  However, remember most farmland is being bought cash.  For a bubble like the housing market to exist you need it to be driven by debt.  And for the farmland market to crash we would have to have a global event take place like the embargo against Russia in the early 80's.

So a farmland gold rush is coming!  This I have no doubt.  Be prepared.  Be informed.  We can help you with that.  Call us at 913-837-4665 or email us at info@ruralkc.com.  Talk with one of us and get on our email alerts to stay up to date.  Don't be left behind.  Because the farmland gold rush is coming.

Should We Be Concerned About A Bubble?

What Causes Farmland To Drop In Value?

Farmland rarely drops in value.  It has, on average, gone up in value by 3% to 5% each year.  Recently it has jumped as high as 25% per year.  This has raised a fear of a bubble much like what happened to the housing market.  Will farmland continue to rise 25% per year in value?  No.  Odds are it will go back to normal rates and raise in value of 3% to 5%.  In the past 100 years farmland has dropped in value only three times.

First time was the great depression.  Everything fell then.  Nothing in this country was safe.

The second time was 1980.  It dropped five years straight.  The reason was farmland was driven mostly by debt.  Much like the recent housing market collapse was driven by debt.  Also. during that time we put a trade embargo on Russia.  Commodity prices dropped due to this.  So the combination of debt driven land and the Russian trade embargo led to this drop in value.

The third time was 2008.  That due to fear from what happened at the beginning of the recession.  That only lasted one year.  Since then value has skyrocketed because many investors looked to safer investments to the stock market.  So land was being bought cash and rarely bought with credit.  The charts below explains this well.

Let's compare farmland to another popular asset.  Let's take gold for example.  You hear about how gold is the way to invest.  One issue is, what is gold if everything does collapse?  Pretty much a paper weight.  Farmland is something useful.  Because, no matter what, we are always going to have to eat.  Since 1919, farmland has cost approximately 2.4 ounces of gold per acre.  This year, the ratio nationwide is 1.6 ounces per acre.  I'll leave you with a couple quotes that back up this claim.

"The time to worry is when debt financing on farming is growing more rapidly than prices, and we aren't there yet."  David Merkel.  The Economist.  April 10, 2011.

"Land Bubble?:  There is data circulating that "78% of Iowa farmland is now owned debt free."  The data is from "2012 Iowa Farmland Ownership Survey."  From my perspective this decreases the amount of land that will be sold in panic if crop prices drop or profitability tightens.  Further backing up my belief that we are not on the cusp of bursting the so called "Land Bubble."  Van Trump Report June 11, 2013.

"Unlike the last bust of the 1980's, farmers' debts are also low relative to their assets.  Fertile land is not a crowded trade.  Managers say they believe that less than 1% is held by institutional investors, with cash rich farmers bidding for the rest.  In some states such as Iowa, institutional ownership is banned."  The Financial Times May 2013.