Farmland values that increased by as much as 20-30%, and the factors that may eventually slow those growing ag land values, headline an updated land values analysis issued last week by the Rabobank Food & Agribusiness Research and Advisory (FAR) group.
“The six-year surge in U.S. ag land values continues to be top of mind for many in agriculture,” says report author Sterling Liddell, vice president of food and agribusiness research & advisory. “We expected land values to grow significantly in late 2011 and early 2012 and the growth was even stronger than we predicted; in excess of 30% in some cases.”
In the report, “U.S. Farm Land Continues to Dazzle,” Liddell draws a strong correlation between the rate of growth and higher corn, soybean and wheat prices, which resulted from persistently tight global grain stocks and low interest rates.
“Strong fundamentals, including elevated commodity prices, low interest rates, increasing rental rates and strong relative returns to agriculture, will continue to make U.S. farmland an attractive investment,” says Liddell.
The U.S. Corn Belt region continued to lead land value growth in 2011 and 2012. States including Iowa, South Dakota and Nebraska were estimated by the USDA to have doubled their 2005 values. An expanded group of states, which adds the Northern Plains and Minnesota, saw year-over-year growth in the range of 15%-30% in 2012. Other states, particularly the Delta states along the Mississippi River, also increased at a faster rate in 2011/12.
The report considers interest rate increases to be the key medium-term threat to maintaining current levels of ag land values.
Looking ahead to the first half of 2013, U.S. farmland values are likely to increase at a slower rate than in 2011 and 2012, assuming steady commodity prices and interest rates. The slowdown is a result of the dramatic 2012 jump in values, as well as looming macroeconomic worries. This slowdown will help to keep values in line with underlying fundamentals. As a result, such a slowing would be beneficial for the long-term financial health of the U.S. crop production industry, the Rabobank report says.
“The prospect of strongly higher interest rates post-2014 and softening commodity prices from current highs present the key long-term risks for U.S. farmland values,” Liddell notes.
The report points out that agricultural land rental rates have surged over the past year, and additional growth is likely in 2012/13, providing support for higher mortgage payments. “While this has more long-term implications, in the short term, increased rental values reflect positive economic returns from land investments,” the report says.
Rabobank believes the 3- to 5-year outlook for corn prices will average in the $5-$6/bu. range, with soybean prices between $12 and $14.50/bu., and wheat ranging from $7-$8.50/bu. “A sustained downward trend in commodity prices would be required before land values would shift lower. Based on current fundamentals, such a shift isn’t expected.”
The report says that a 2011 Iowa State University land values survey reported the continuation of a six-year trend where existing farmers increased their proportion of land purchase from near 70% to 74% year over year. Since the trend began in 2005, the survey has recorded an increase in the proportion of existing farmers’ share of purchases, from 56% in 2005 to 74% in 2011.
“Increased farmer ownership is likely to stabilize values in the long term as the land is being purchased for business operations rather than for investment opportunities,” the Rabobank report says.
“Additionally, U.S. farmers continue to maintain historically strong balance sheets, with a USDA-estimated, debt-to-equity ratio of 11.68% in 2011 compared to over 22% in the 1980s.”