Limits on Land, Not Housing

January 8, 2013 09:12 PM
Limits on Land, Not Housing

No return in sight for farmland values as prices continue up

Why did land values skyrocket at the same time the housing market crashed? One expert says it all boils down to supply and demand.

"You can build an infinite supply of houses in the U.S., whereas farmland is shrinking at roughly two acres per minute, according to American Farmland Trust," says Marc Schober, a director at Colvin & Co. LLP, a company that invests in farmland. Farmland and housing are completely opposite, he notes.

"Lender restrictions are getting tighter and tighter, with debt coverage service ratios increasing," Schober says. "On the other hand, almost anyone can buy a home with very little down."

According to Iowa State Univer-sity, 72% of all farmland in Iowa is owned debt-free. That’s just not the case with homes, which is a big part of why we saw the housing market crash, says Schober, who does not believe land prices are in a bubble. "It is not unusual for a farmer to put 50% down," he says.

"Land that was selling for $2,500–$3,500 per acre 10 years ago now sells for $8,500–$11,000 per acre."

An auctioneer who specializes in selling farmland in Willmar, Minn., says, "The escalation of farmland is phenomenal—it can not be overstated." Glen Fladeboe, co-owner of Fladeboe Auctions, says land that was selling for $2,500 to $3,500 per acre 10 years ago now sells for $8,500 to $11,000 per acre.

A Safe Place. Schober and Fladeboe say farmers and investors realize that placing their money in farmland is safe and can yield good returns.

For example, Fladeboe says, if you have $1 million you can put it in savings or you can purchase farmland. "If you put it in savings, you can potentially earn 1% to 3% interest; however, if you purchase farmland, you’re looking at a potential 4% to 6% return," he says. "Because interest rates are so low across the country, the rate of return is significantly higher for farmland investments, and people are taking note."

According to a USDA Economic Research Service report, strong farm earnings appear to have helped farmland markets withstand the significant downturn in the residential housing market in recent years.

Schober says four factors come into play with land values: land supply and demand, the nature of asset classes, lending restrictions, and demand from emerging markets.

"The U.S., specifically the Midwest, is blessed with quality farmland not found anywhere else in the world," he says. "Everyone has to eat. Couple the increasing population with the changing diets in China and India, and demand far outweighs supply."

Fladeboe says commodities today have much more value than they did 10 and even 20 years ago. Domestic and global demand has significantly increased for corn and soybeans. There’s a  frighteningly low amount of corn available, Schober says.

In comparing the housing market to the farmland market, Schober says the housing market correlates with the overall economy. Farmland is driven by people needing to eat. "If you’re going to invest in farmland, you can’t do it blindly," Schober advises. "The typical investor is a high-net-worth individual who is looking to diversify his portfolio and is very aware of the global supplyand-demand story."

This doesn’t mean investors aren’t scouting for changes on the horizon. Schober keeps his eye on commodity prices and yields, interest rates, demand from China and India, and revenue stream from farmland. He also factors in what’s going on with diesel fuel, fertilizer, oil, cotton, sugar and rye.

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