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November 2012 Archive for Farmland Forecast

RSS By: Marc Schober, AgWeb.com

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

The State of U.S. Farmland Values

Nov 26, 2012

High commodity prices and net farm income have driven U.S. farmland values to record highs. The Federal Reserve Bank of Chicago reported that farmland values rose 13% over the last twelve months. Strong demand for farmland from farmers and investors has led to some irrational prices, including a $21,900 per acre sale in Sioux County, Iowa.

What do these record prices and strong appreciation in farmland mean? Is farmland overvalued or is the increase a function of the improving fundamentals?

 

The short answer is we think the U.S. farmland market is fairly valued based on the current fundamentals and near-term outlook for agriculture. Futures markets are pricing in $6 corn through 2015, which makes a strong argument that farmland values are actually underpriced.

 

We think we are in the second-to-third inning of a long-term bull market in agriculture.

 

What is exciting about farmland is the agriculture thesis hasn’t even played out yet. Most agriculture investors are attracted to the sector because of the wealth creation due to the transfer to a protein based diet in emerging markets. China is expected to increase corn imports from 1 million tons in 2010 to 15 million tons by 2014. Emerging market demand for grain has not even occurred yet.

 

U.S. agricultural fundamentals are certainly the best in decades, if ever. The ending corn stocks to usage ratio (current inventories as a percentage of annual consumption) has declined over the last eight years from roughly 20% in 2004 to 5.6% in 2012. U.S. corn stocks are now at a 20 day supply, meaning that if corn production was halted, the U.S. would run out of corn in a little over half a month.

 

Tight grain supplies have resulted in record net farm income in the last few years. The USDA estimates that farm income rose 28% in 2010, 47%, in 2011, and will rise by 4% in 2012, allowing farmers to reinvest their cash flows back into farmland to expand their operations.

 

The long-term average cap-rate for U.S. row-crop farmland has been 5.0% and we see today’s market average at somewhere between 4.5% - 5.0%. There certainly are some buyers paying idiotic prices for farmland, but there are just as many good acquisition opportunities available.

 

The media is highlighting a few high dollar sales, which aren’t representative of the overall market. Taking the multiple of one $1 million dollar sale and assigning that multiple to a $2.5 trillion dollar industry isn’t fair. Amazon.com trades at roughly 100x its forward P/E multiple. No one would then assign that same multiple to the S&P 500.

 

The other data point that can be misleading when valuing farmland is the average cash rental rates. We estimate that U.S. farmland owners are only receiving 50% of the fair market cash rental rate. This means U.S. farmland owners are leaving roughly $30 billion of rental income on the table. The average reported cash rental rates as reported by the Federal Reseve, USDA, and Universities, are typically much lower than fair market rates. Some rental contracts are also multi-year, which causes rates to lag current fundamentals.

 

What helps us sleep well at night though is farmer balance sheets still remain conservative and current debt-to-asset ratios are at 40 year lows according to the USDA. Majority of farmland acquisitions we observe are 100% cash. New banking regulations have constricted the access to capital for farmland buyers and loans secured by farmland are typically limited to 50% of the purchase/appraised price.

 

Despite the positive story behind agriculture, we do think farmland investors have to be more cautious than ever. Patience, due diligence, and negotiation are the keys to identifying value in one of the most exciting asset classes of this decade.

 

For daily articles on farmland and agriculture, visit www.farmlandforecast.com 

 

 

Farmland Price Index Jumps 17%

Nov 20, 2012

The Rural Mainstreet Index (RMI) increased for the third consecutive month indicating the rural economy is showing signs of improvement. The farmland price index posted its highest one month increase since the initiation of the survey in 2005.

The RMI increased ever so slightly to a 57.5 from a 56.6 in October. According to Creighton University economist Ernie Goss, “Our survey indicates that the Rural Mainstreet businesses are shedding the negative impacts of the 2012 drought. However, given the continuing lack of moisture across much of the region, this economic respite may be short-lived.” 
Rural Mainstreet Index November 2012
Agriculture
The farmland price index jumped 12.2 points, posting an 83.9 this month, the largest one month increase since the survey started. This marks the 34th consecutive month the index has been above growth neutral. The farm equipment sales index decreased slightly  to 60.4 vs. 60.5 last month.
 
Farmland Price Index November 2012
 
Bankers were asked what the biggest challenge for ethanol producers would be in the coming year. An overwhelmingly 67.7 percent indicated high corn prices as the number one challenge.
Banking
The loan volume index increased to 47.8 from a 44.2 in October. The check deposit index increased to 75.1 from 66.7 last month and the certificate of deposit and savings instruments increased to 45.5 from 42.0 in October. “Despite the 2012 drought, farming and non-farming businesses have remained financially healthy with solid cash balances,” explained Goss.
October's hiring index increased slightly to 53.0 compared to 51.5 last month. The economic confidence index, which reflects expectations of the economy in the next six months, decreased to below growth neutral, 45.6. Ernie Goss said, “The uncertainty surrounding the national economy including the 'fiscal cliff,' the farm bill, and energy policy are negatively affecting the economic outlook of bankers.”
Survey
This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

For daily articles on farmland and agriculture, visit www.farmlandforecast.com 

Midwest Farmland Values Rise 13% Despite Drought

Nov 19, 2012

Farmland values rose 13% over the last twelve months in the Midwest despite the worst drought in over 50 years, according to the Federal Reserve Bank of Chicago. In the third quarter of 2012, farmland values rose 5% in the District, compared to 1% in the previous quarter. Demand for farmland continues to remain strong as farmers are expected to set a record net income in 2012, due to high commodity prices and crop insurance payments.

 

“The drought does not seem to have derailed bankers’ anticipation of further upward movement in farmland values,” said David B. Oppedahl of the Federal Reserve Bank of Chicago. “Survey results indicated that the impetus for higher farmland values actually strengthened during the third quarter of 2012.”

 

Chicago Fed Quarterly farmland values third quarter 2012

Iowa’s farmland values continue to lead the Midwest, increasing 18% over the last twelve months, compared to 15% in Illinois, 11% in Indiana, and 8% in Wisconsin.

 

Agricultural fundamentals are expected to remain strong as 36% of bankers expect farmland values to rise over the next three months. Only 1% of respondents expect farmland values to decline. Bankers anticipate that farmers will be the primary buyers of farmland as well as greater demand from nonfarm investors over the next three to six months.

 

The drought is expected to more adversely affect earnings of livestock operators than those of crop farmers. Net farm income is expected to rise 4% in 2012 to a record $122.2 billion. 48% of bankers expect net cash earnings from crops to rise over the next three to six months and 24% anticipate a decline in earnings.

 

Credit conditions in the district continue to improve as the average loan-to-deposit level declined in the third quarter to 67.5 from 69.0 a year ago. Loan demand in the third quarter jumped to 81 from 69 last quarter. 49% of bankers indicated there were more funds for lending available than a year earlier. Average interest rates for real estate loans in the district hit new record lows at 4.86%.

 

The Federal Reserve Bank of Chicago’s second quarter survey of Farmland Values and Agricultural Credit Conditions Report is a summary of the 7th District’s value of farmland, farm loan portfolio performance, and on-farm income. The 7th District consists of the entire state of Iowa, and portions of Illinois, Indiana, Wisconsin, and Michigan.

 

For daily articles on farmland and agriculture, visit www.farmlandforecast.com 

Crop Progress: An Early End to Harvest

Nov 13, 2012

The USDA released their Crop Progress report today indicating corn harvest is complete with soybean harvest close behind. This marks the end of our coverage for the 2012 Crop Progress. For continued coverage visit http://is.gd/0Djze8

As of November 12, 2012 the U.S. soybean harvest is 96% complete, compared to the five-year average of  93%. Winter wheat emerged is at 79%, trailing last year's progression of 81%. Winter wheat in very poor or poor condition was 22%, an 8% increase from last year. Winter wheat in good or excellent condition was 36%, a 14% decrease from a year prior.
 
Corn prices decreased by 1.6% over the past week ending at $7.23 per bushel, but year-over-year prices have increased by 14.2%. Soybean prices decreased by 5.1% over the past week ending at $15.04 per bushel, but year-over-year prices increased by 21.8%. Wheat prices ended the week at $8.51 per bushel, a 1.7% decline from last week. Year-over-year wheat prices have increased 38.4%.
 
For daily articles on farmland and agriculture, visit www.farmlandforecast.com 

WASDE: Corn and Soybean Yields Increase

Nov 09, 2012

The USDA's November WASDE held few surprises, but the increase in corn production was not expected. Increased rainfall helped propel soybean production and supplies. Corn, soybeans, and wheat prices are expected to decrease according to this report.

Corn

The average corn yield in the U.S. was adjusted to 122.3 bushels per acre, only a 0.3 bushel increase from last month. U.S. 2012/13 corn production was forecasted up 19 million bushels due to increased yields.
 
Due to the U.S. drought there was an estimated 25 million bushel increase in U.S. imports for 2012/13 due to expected shipments to southeastern feed markets, which usually relies on the eastern Corn Belt. U.S. ending stocks were estimated at 647 million bushels, a 28 million bushel increase from last month. Corn season-average farm price has been lowered on both ends of the range to $6.95-$8.25 per bushel.
 
Global coarse grain supplies in 2012/13 were estimated to increase 1.8 million tons, mostly due to larger carryover stocks from Mexico and EU-27, and increased U.S. production.
 
Soybeans

2012/13 U.S. soybean production has again been projected up, 111 million bushels, to 2.971 billion bushels due to increases in yield. Average soybean yield was projected at 39.3 bushels per acre, 1.5 bushels above last month's projection due to increased seasonal rainfall.        
 
Exports for 2012/13 were increased by 80 million bushels to 1.345 billion bushels due to increased supplies and strong pace of sales. U.S. 2012/13 ending stocks were increased by 10 million bushels to 140 million bushels. The 2012/13 average soybean price was lowered by $0.35 on both ends of the range to $13.90 to $15.90 per bushel.

Wheat 
 
2012/13 U.S. wheat ending stocks were increased by 50 million bushels to 704 million. Slower shipment pace and stronger than expected competition lowered 2012/13 wheat exports again, by 50 million bushels. The season average wheat price for 2012/13 was projected lower to $7.75 to $8.45 per bushel.
 
Global wheat supplies were estimated 1.9 million tons lower. Global wheat production was also decreased by 1.6 million tons due mainly to decreased production in Australia.

Outlook
 
With harvest nearly complete, we switch attention to political issues in the coming months that affect agriculture, including the Fiscal Cliff, Farm Bill, and Crop Insurance. For agriculture news and research, visit www.farmlandforecast.com.  

Crop Progress: U.S. Harvest Wrapping Up

Nov 05, 2012

The USDA released their Crop Progress report today and indicated harvest for corn and soybeans is almost complete. The WASDE report will be released on Friday and we look forward to yield and production estimates.

As of November 5, 2012 the U.S. has harvested 95% of the corn crop, compared to the five-year average of only 71%. Corn prices decreased by 2.8% over the past week ending at $7.35 per bushel, but year-over-year prices have increased by 12.6%.
 
Soybean harvest is 93% complete, compared to 91% at the same time last year. Soybean prices decreased by 2.8% over the past week ending at $15.04 per bushel, but year-over-year prices increased by 26.2%.
 
Winter wheat planting has progressed to the same percentage as last year at this time; 92%. 73% of the winter wheat has emerged. Winter wheat in very poor or poor condition was 19%, a 5% increase from last year. Winter wheat in good or excellent condition was 39%, a 10% decrease from a year prior. Wheat prices ended the week at $8.66 per bushel, a 0.2% increase from last week. Year-over-year wheat prices have increased 35.7%.
 
For daily articles on farmland and agriculture, visit www.farmlandforecast.com 
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