The key determinant in the susceptibility to land value changes is an area’s reliance on grain and oilseeds.
During the next year, farmland values will likely hang tough, although the rapid acceleration is likely over. However, within three years, a decline of 15% to 20% in the central U.S. is probable, according to a new Rabobank report.
"We are entering an era where planning how you’re going to pay for your land is likely to become as important as planning to market your crop," says Sterling Liddell, senior analyst.
"We’ll likely see lower commodity prices this year, but they aren’t going to be low enough long enough to substantially impact land values over the coming year or so," Liddell says. In the short term, strong farmer balance sheets and high rental rates will support current land levels, but decreasing commodity prices will keep values from accelerating as rapidly as they have been. Also supporting land values in the near term is the fact that for 2013, crop insurance is set at $5.65/bu. for corn and $12.87 for soybeans.
The story is different in the medium term as Liddell sees it. The No. 1 culprit: looming higher interest rates, the single most important risk factor to farmland values. Interest rates have been increasing through the first half of 2013, but based on current Federal Reserve policy, a significant increase isn’t expected until 2014 or 2015, coinciding with when he sees farmland values falling.
The rate of decline Liddell predicts for farmland values varies among regions. Corn led the ramp-up in commodity prices and the associated increase in land values. If corn were to fall below $4.50/bu. for an extended period of time, "a significant decrease in land values could follow," Liddell states. Rabobank’s medium-term average corn price is $5/bu.
The key determinant in the susceptibility to land value changes is an area’s reliance on grain and oilseeds, he says. Since the four dominant commodity crops (corn, soybeans, wheat and cotton) compete for the same acres in the Midwest, Plains and Delta regions, global grains/oilseed prices will be key factors in determining land values. In these regions, as global stocks grow, prices will drop, leading to some decline in farmland values over the next two to three years, Liddell predicts.
In the western U.S., values are expected to move in the same direction as those in the Midwest. However, western value declines, particularly those in California, should be less dramatic than the rest of the country. "This is due in large part to the diversity of crops grown in the region," the report says, along with urban influences. Orchards, vineyards and irrigated land in the West have seen extreme increases in land values due to strong market prices and growing export demand. The strength of the U.S. dollar is important, along with interest rates, because a stronger dollar would negatively affect many commodities grown in the West.
In the Southeast, expected increases in interest rates and declines in major cash commodities will lead to a difficult medium term for land values, especially if commodity prices declines lead to a reduction in land rents, the report says. The forecast rate of decline is less than that in the Midwest, however.
Over the long run, Rabobank says it is reasonable to expect ag assets to again appreciate at similar rates seen over the last 20-plus years. "The growth of global food demand makes the value of U.S. agricultural capacity more vital in the future."
Even in the medium term, Liddell does not expect a land value crisis. Most purchases of U.S. farmland in recent years have been with an abundance of cash, well within the 60% to 70% loan-to-value range required by most lenders. "The depreciation we anticipate in the next three years will most often be within loan-to-value ratios required by lenders." There will be some instances where borrowers will find it difficult to service their debt, however, especially on land with marginal production capacity. On balance, though, "the contraction will be manageable," the report says.
Strategic business plans for farmers should include stress scenarios where corn price drops below $4.50/bu. for at least one crop cycle. At this level the majority of farmers will face below breakeven incomes, Liddell says. "Adequate working capital and effective marketing strategies will allow land owners to survive such scenarios and be prepared to take advantage of expansion opportunities."