Even though it’s surrounded by uncertainty, it’s steady as she goes for ranchland values in 2014, experts say. That’s thanks to a growing appetite for cowherd expansion and the continued low interest rates that have added a positive puff to the wind beneath the wings of land prices in the last decade.
The question is, the experts say, will that be enough to counter a downturn in corn prices and the effect that it has — in some regions at least — on pasture values?
Which leads many, including George Clift, owner of Clift Land Brokers in Amarillo, TX, to answer honestly when asked what land values will do in 2014. “I don’t know,” he says. Part of that uncertainty comes from the fact that in the area he works — Texas, Oklahoma, New Mexico and Colorado — not many ranches are on the market. “It’s in tight hands, and there’s not much that sells,” he says, which makes it hard to set any definitive trends.
However, for ranches that have been properly managed, he expects a steady market in 2014. As the region emerges from the ravages of drought, ranches that were destocked in a timely fashion and grazed properly during the drought will be the most desirable ranch real estate as the industry looks for more grass to handle an expanding cowherd.
Kevin Dhuyvetter agrees. “I think we will see pasture values remain strong, but we won’t see the big increases that we’ve seen in recent years,” says the Kansas State University ag economist. “I suspect we’ll see pasture values steady to up slightly relative to 2013.”
If that expectation holds, it will mean a flattening in land values, based on a trend-line analysis of pasture values the past 10 years.
Pastureland values in Kansas for the past 10 years showed an average annual growth rate of 12.1%. However, for the past two years, the growth was double that, at 24.2%. That compares with an average annual growth rate in pasture rents of 3.4% and 4.6% in the past two years, he says (Figure 1).
Price trends reported by the Kansas City Federal Reserve have been slightly higher for pasture in its district (CO, KS, NE, OK, WY, northern NM and western MO), he says, but not substantially different. “So I think this is a reasonable proxy for how things are changing over time.”
The national data show some similarities, he says, and some differences. “The similarities are that land values have risen faster than rents over the last 10 years. But pasture values at the national level saw the biggest growth in the early part of this time period [prior to the recession]; and in Kansas, the fast growth has been in recent times.”
Growth in lease rates is much lower on average, but also more consistent, Dhuyvetter says. Thus, he projects that 2014 will be “more of the same.” However, what ultimately happens with lease rates remains to be seen. “There are going to be two conflicting forces regarding pasture rents in 2014,” he predicts.
“First, we know that cow-calf enterprises look quite favorable going forward; thus, there is pretty good incentive to increase herds,” he says. This should increase the demand for pasture, which would spur stronger lease rates.
“However, we’ve seen the corn market fall significantly since a year ago, which means there will be less incentive to put weight on feeder cattle outside of feedlots,” he says. “This will lower the demand for grass potentially.”
In addition, he says it’s important to acknowledge the effect that pasture condition has on lease values. “While most regions have seen some improvement, some areas are still in pretty tough shape,” he says. “In those areas, it will be pretty hard to see pasture rents increase on a dollar/acre basis.”
Lease rates may increase on a dollar/head basis, he says, but if it takes more acres to run the cattle, the dollars/acre may be flat or even down. “Bottom line, stocking rate has a huge impact on pasture rent/acre” he says.
Taking all that into account, his tea leaves say that pasture rents will likely be slightly higher than the 10-year average (Figure 2).
Location, location, location
The old real estate adage that the three factors that affect price are location, location and location is true both for a house in town and a ranch at the end of a gravel road. Looking at the differences in national averages and those in the Central Plains points to an important consideration in land values, Dhuyvetter says — what part of the country are you in?
In regions heavily influenced by crop production, ranchland values have seen a stronger uptrend. “However, in regions with less crop production influence, pasture values have been much softer, and in some cases even fallen, in recent years,” he says.
In crop-producing regions, farmland prices affect grass values, either indirectly because producers have more money in their pockets when corn is high, or directly because high corn prices make grass much more valuable for stocker weight gain. While that’s a regional dynamic, the effect is enough to influence national averages (Figures 3 and 4).
“I believe lower corn prices will put downward pressure on both pasture values and rents,” he says. In part, that’s because in the Midwest, where pastures have been plowed under to grow $7/bu. corn, a drop to $4.50/bu. corn will put the brakes on any more sod-busting. And, should the lower corn prices prove to be a multiyear trend and cropland values retreat as a result, that will ease the upward pressure on all ag land values, he says.
“The big question is whether or not this negative effect will be bigger or smaller than the cowherd expansion positive effect.” That answer, he says, is still unknown.
Cash is king
However, in the Southern Plains, Clift says the price of corn and corresponding cropland values don’t seem to affect ranchland prices. “You don’t buy ranchland to make a return like you do a corn farm,” he says. “So, interest rates are going to impact that more than the price of corn.”
And there, experts think that long-term interest rates will begin to increase. (We’ll discuss this topic in the February issue.)
What’s more, because of the drought and the heavy destocking it caused, he says the ranches that do sell in his area are bought by ranchers from other regions. “If you list a ranch in northeastern Colorado and expect it to trade to somebody from northeastern Colorado, those ranchers aren’t the buyers. The buyers are ranchers from other places,” he says.
Usually, according to BEEF magazine’s ranch real estate analyst Michael Fritz, those buyers come with cash in hand. And where they look to buy will influence regional land values.
In parts of Texas, where oil shale development is underway, and in the Dakotas, where the Bakken play is ongoing, oil and gas income is likely to boost pasture values more in percentage terms than cropland values in areas where pasture is lower-valued, he says. “It’s put a lot of money in people’s pockets, and is really driving ag land values far and wide of that area.”
“The other wild card is drought,” says Fritz, who publishes the Farmland Investor Letter. “If drought persists in the Southern Plains, pasture rates in the Central and Northern Plains will rise as cattlemen seek to place cattle where there is grass.”
But all in all, the outlook for ranchland values is positive. “Fundamentally, the value of land is derived from the value of future return prospects,” Fritz says. “For pastureland, that’s typically livestock, and the margins for cattle have been pretty strong. It puts cattlemen is a stronger financial position to compete for grass if they want it.”
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