U.S. pasture values climbed an average 6% to $1,230/acre this year. That's sharply behind last year's 16% pace and extends a flattening trend that followed 2006's 22% spike in pasture values, according to USDA data.
Shrinking beef industry profits and a smaller U.S. cattle inventory have prompted market participants to turn more cautious in bidding up grazing-land prices. In addition, the sagging U.S. economy and extended housing slump have cooled recreational demand for pasture tracts.
Still, pasture prices have maintained their growth edge over cropland this decade, rising an average 11.1% annually, vs. cropland's 9.3% pace — thanks to earlier pasture-price surges driven by recreational buyers. Stock returns — as measured by the broad S&P 500 Index — have been essentially flat since the start of 2000 through this July.
As non-agricultural demand for pasture tracts has eased, demand from livestock producers is accelerating as cattlemen move to offset high grain-feeding costs by putting on weight with lower-cost grazing. This corn-grass arbitrage play helped push pasture lease rates up 8.3% this year to an average $13/acre as cattlemen scrambled to graze feeder cattle to heavier weights before moving them into feedlots.
If high grain prices persist, demand for stocker cattle grazing could push pasture rents substantially higher in regional markets. This would help bolster pasture rent-to-value yields that have shrunk to an average 1% today, from 1.6% at the start of this decade.
King Ranch offers case study
To understand how high feed-grain prices are increasing demand for pastureland, consider how industry giant King Ranch Inc. exploited the current gap between feed grain and grazing costs: Last spring, when South Texas was still in the grip of drought, the ranching giant trucked 6,000 cattle as far as 873 miles to graze in Kansas, Oklahoma and North Texas rather than add another 250 lbs. of gain by running them through the ranch's feedlots.
Dave DeLaney, general manager of livestock and ranching operations, figured it would cost him 40¢/lb. of gain on grass for his 600-lb. cattle, vs. about $1/lb. if he ran them through the ranch's feedyard. Even after paying the $8/head freight costs to Kansas, DeLaney figures he turned what could have been a $60-$70/head loss to sell the cattle at 600 lbs. into a $30-$40/head profit by shipping the cattle to Kansas.
“When someone has to pay $5/bu. for corn to feed a calf, it's a whole lot smarter to let them run on grass a little longer,” notes Kevin Dhuyvetter, a Kansas State University economist. “Pasture values will keep going up because they are worth more for rental property.”
Dhuyvetter projects that if $5 corn persists, pasture rents could leap another 50% over the next couple of years and still offer a lower cost of gain than corn. This rent pressure will be driven in regions where there is a credible threat of raising stocker cattle on grass, he adds.
Nebraska is hot
The most heated market nationally for pastureland is Nebraska, where pasture values spiked 23% last year to $530/acre. Farmers looking to expand their existing farming and ranching operations continue to dominate the land market.
Market participants say there are two other primary driving forces behind this extraordinary land price gain in Nebraska. One is the recent demise of the state's ban against corporate land ownership. The other is the arrival of pension-fund and corporate investors whose purchases are triggering 1031 tax-deferred exchanges for trade properties, which ripple back into the ranchland market.
Consider this chain of events: In February, an entity affiliated with Wexford Capital LLC, a Greenwich, CT hedge fund and private equity firm, paid $52 million for 19,202 acres of mostly irrigated cropland in Lincoln County, NE. The seller — Don Oppliger of Farwell, TX — reinvested nearly $28 million of the proceeds through a 1031 tax-deferred exchange purchase of 7,551 acres of center-pivot irrigated cropland in Holt County, NE.
In June, Don Kilday, a seller of some of the Holt County cropland, used proceeds from his sale to pay $500/acre for a 16,000-acre ranch southwest of Dunning, NE. Typical Sandhills grass in this region was trading near $350/acre before Kilday's purchase. Oppliger paid an estimated $500-$1,000/acre above the market to assemble his Holt County exchange property, according to a knowledgeable source.
Buyer demand for Nebraska land so far shows no signs of easing. Osborne Cattle Company, a 17,591-acre Sandhills ranch north of Paxton along the North Platte River that was put up for sale in January, is under contract to sell for $11.5 million ($654/acre). Local observers had pegged the ranch's market value between $9 and $10 million.
Values fall in Southeast
Elsewhere across the country, pasture values posted double-digit, one-year gains in another 16 states, centered mostly in the Northern and Southern Plains and the Corn Belt.
The exception was the Southeast, where the Florida and Georgia land markets are contracting in the wake of a land-buying frenzy in which speculators fueled a 22% annual average price growth in Georgia and 25% in Florida between 2000 and 2007. Pasture values fell 4% last year in both states.
The combination of three years of drought, falling cattle profits and fewer Floridians looking for land in Georgia has softened demand for land, says Jeffery Peterson, a senior vice president at Southern Plantations Group in Albany, GA. Peterson looks for Georgia pasture prices to stabilize or move lower over the next year, depending on profits in the cattle sector.
In Texas, the country's biggest cattle ranching state, ranchland values rose 12.5% to $1,488/acre for the 12 months through June. That is off the 18% annual pace for June 2007, according a Federal Reserve Bank of Dallas survey of agricultural bankers.
The Texas rural land market appears to have entered a pullback from the rapid price run-up of the past five years, reports Texas A&M economist Charles Gilliland. The number of Texas rural land sales in this year's first half is down 38% vs. the same period a year ago, according to a Texas A&M University survey. Market participants report weakening buyer demand for large working livestock ranches.
Gilliland notes it's too soon to tell whether this leveling off of land prices and lower sales volume reflect a return to more sustainable price increases, or the start of a retrenchment.
Ranchland appreciation rates also continue to ease across the Plains and Mountain states. Pasture prices in Kansas, Missouri, Nebraska, Oklahoma, Colorado, Northern New Mexico and Wyoming rose an average 11.8% for the 12 months through June, according to the Federal Reserve. That's down from 16.4% for the comparable period a year ago.
Absent a sharp economic downturn, most market participants look for ranch prices to continue to increase at a more modest pace.
Mike Fritz, owner of Mercator Research LLC, in Monona, WI, is editor and publisher of Farmland Investor Letter®, a monthly subscription newsletter providing farmland market insight and intelligence for farmland investors and managers. He can be reached at [email protected] or visit www.farmlandinvestorletter.com.
Harvesting the wind
Wind-farm development is a driver in the foreign purchasing of U.S. agricultural land.
After remaining relatively unchanged from 1996 through 2006, foreign individuals and entities increased their holdings of U.S. agricultural land by 34%, or 5.3 million acres, for the 12 months through February 2007, according to government data. Most of the increase is due to million-acre-plus purchases of timberland by Canadian and Netherlands companies.
Foreign holdings in U.S. pastureland fell 102,533 acres or 2.3% over the one-year period. Foreign buyers were most active in the Northern Plains and Lake States regions, where they boosted pasture holdings 15.2% and 1.3%, respectively.
Meanwhile, foreign holdings in Kansas pastureland jumped 5,582 acres, or 33%, fueled by wind farm developments. Increasingly financed by big European utilities, wind-farm developers are mounting a land grab, rushing to pull together parcels of land in areas with good wind.
The Smoky Hills Wind Project, which involves more than 110 Kansas landowners and 26,000 acres across Lincoln and Ellsworth counties, is being developed by Lenexa, KS-based TradeWind Energy, LLC, which is partially owned by Enel, S.p.A., Italy's biggest power utility. Other European utilities investing in U.S. wind power developments include Germany's E.On, Energias de Portugal of Portugal, and Spanish utility Iberdrola SA.
TradeWind is developing wind farms in 12 states, including two 30,000-acre projects in Atchison, Adair and Sullivan Counties in Missouri; a 15,000-acre project in Elk County, KS; and two wind farms in DeWitt County, IL. Wind-tower leases typically include a 30- to 40-year term.
Foreigners were the most active sellers of pastureland in the Corn Belt and Northeast, where they trimmed their holdings 28% and 25%, respectively. Much of this decline is tied to pastureland owned by Pittsburgh-based CONSOL Energy Inc., which owns some 430,000 surface acres of land in the U.S. and Canada. CONSOL — controlled by German energy company RWE Group in the 1990s — went public in 1998. RWE's equity interest in CONSOL is now less than 10%, which is below the foreign-ownership reporting threshold.
Under the Agricultural Foreign Investment Disclosure Act, foreign investors who acquire, transfer or hold a 10% or greater interest in U.S. agricultural land are required to report all purchases and transfers within 90 days to the USDA Secretary. The regulations also require foreigners to report leases of 10 years or longer.