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The Land Investor

News and Commentary on Land-based Investment

Private Energy and Commodity Wealth looks to Land Investment

Today’s DTN/Progressive Farmer featured an article that accurately describes what we are observing at
Fay Ranches in the land investment market.
The booming new energy era in Texas is generating billions of dollars of new wealth for the U.S. economy and a good amount of that cash is being invested in the Texas land market and the traditional locations where Texans have historically invested – the Rocky Mountain Region.  These trends have resulted in significant shifts in the land investment scene, such as the recent partnership forged by major regional land brokerages,  Bozeman-based Fay Ranches and Houston-based Republic Ranches.
Oil and Gas professionals are land savvy and Charles Gilliland, land market authority at Texas A&M’s Real Estate Center, notes “there is a shortage of property listings, and prices continue to hold up well. The market for rangeland is particularly strong, and cropland sales are active.  There seems to be a real interest in getting hard cash into hard assets that will preserve value,” he said. There is no sign of land prices leveling off. If anything, they are going up faster than they have in the last couple of years.”
Readers should be cautioned not to confuse the bullish land investment trends observed in the DTN article that focuses on productive ranchland and farmland to “ranches” of a different ilk – the properties which are basically homes on acreage in the rural west.  I will include the ranch preservation communities in this category.  The luxury auction community is very active at this time, clearing (with deep discounts) the inventory of the opulent homes on marginal land that today’s mindset views as a non-producing asset and operating burden.  These went out of favor in the ’07 economic crisis and when the economy improved the appetite for this ilk of ranch did not rebound and continue to lag.
The wealth not only flows from the oil wells but has poured from the grain bins.  With respect to farmland, DTN cites that over 70% of today’s purchases are made by farmers.  The great tracts are being absorbed by industry specialists.  Relaxed commodity prices have taken the speculator out of the market and millions of acres of marginal lands will likely go out of production.
Farmers will pay top dollar for “locationally correct” farmland that enhances their current base of leased and owned farmland.  The marginal farmland that was put into production at the peak of the commodities boom is experiencing the biggest drops in value.  The marginal farmland requires more inputs to operate; and accordingly, the big discounts are in this segment.  The top quality land that has been farmed year in, year out for the past 150 years has leveled although there is caution that values could relax some in the spring when future earnings streams become clearer and new leases are negotiated with farmers on leased land.
Land Market
Pasture Prices Pulling Ahead
Victoria G. Myers Progressive
Farmer Senior Editor
Mon Nov 10, 2014 11:35 AM CST
Bob Bunselmeyer dipped his toe into the Illinois land market recently. What he got was a new 60-acre tract of cropland for the family’s Macon county farm. What he didn’t get, he quips, was anything you would call a “bargain.”

“We bought because of location and soil quality, and it was probably at market value,” he said. “But with prospects for lower commodity prices, we kind of felt a dark cloud hanging over the whole thing.”
That dark cloud, otherwise known as cheap corn, appears ready to dump cold water over much of the nation’s cropland market. This summer was marked in some regions by no-sales at land auctions, as appraisers and brokers began describing the mood as
confused or sideways. Many landowners are worried about overpaying for land, especially in the Midwest, where some of the highest price tags in the country hang.
For Bunselmeyer, there is no looking back. He said he has no buyer’s remorse, adding the tract was a business decision aimed at building up the family’s 2,000-acre corn and soybean farm.
“I don’t buy land with the intention of selling it. I take the long view. The intention is to farm it. That said, you’ve still got to be able to make something off of the land,” he added.
Bunselmeyer declined to share specifics on the price he paid for the Illinois land. However, he stressed any acre of cropland over $10,000 can’t cash-flow at today’s corn and soybean prices. He expects to see a correction in the land market but thinks it will hinge more on the 2015 crop than this year’s. Like every farmer in business today, he’s a born optimist.
“I have to believe commodity prices won’t stay where they are today. I anticipate we’ll see the low this fall, and then we’ll get a bounce going into the spring and summer. More than likely, there will be weather problems somewhere in the world, and
production won’t be as good, so things will turn around.”
Without higher commodity prices moving into the 2015 season, Rabobank’s Sterling Liddell said a correction in land values will have to take place to avoid what he described as an asset bubble. This is where the cost of an acre of land has grown beyond its earning value.
“Growth in land value is outpacing economic returns generated by farming the land,” said Liddell, vice president of Rabobank’s Food and Agribusiness Research and Advisory group in Missouri. He projects the ratio of average gross revenue to land values will drop below 10% for Midwest row-crop operations this year. In comparison, the last 15 years have seen that ratio hold between 12 and 15%. At our long-term price outlook for corn [$4.50 to $5 per bushel], land values would need to contract by over 10% from today’s levels to allow revenue to regain the historic balance of 12% of land value,” he said.
Liddell anticipates it will be a “painful process” to see land values contract. That’s because it won’t just affect land prices; rental rates will be affected, as well.
“If you pay too much for rent the first year, you can’t make it cash-flow, and that eats into profits,” Liddell explained. “Rent is a pure expense, a pure input cost. If you continue to bid a rental rate that you know is a negative, you have to cut back somewhere else if commodity prices don’t improve. That may be fertilizer, herbicide or other inputs. At some point, it’s detrimental to
the land, and something has to change.”
That’s why, as the land market shifts, Liddell said marginal land will see the biggest price declines.
“Marginal land is the higher cost land to farm,” he noted. “When you start looking at cost per unit of production, the areas where you can yield the most are the areas where it cost you the least to farm. As expansion took place, we saw marginal land move into row crops; there was a conversion of land use. That will tend to go back to where there’s the most incentive. I think that will
be pasture, hay, the feeder-calf market and regional crops like cotton, rice and barley.”
On the whole, Liddell takes the unpopular position that over the next three years, 4 to 5 million acres will need to be forced out of production, or land values will face strong downward pressure. He said since 2009, 11 million additional acres have been
planted to corn, wheat and soybeans. Of the increase, North Dakota accounted for 12% of those acres; South Dakota 9.4%, Missouri 8.8%, Nebraska 5%, and Kansas 5%.
While landowners in the Midwest watched row-crop acres jump and land prices climb, most Texas producers have been fixated on rainfall, or a lack of it, and how that will impact their long-term survival. What they haven’t seen over the course of the drought, however, is a marked decrease in cropland or rangeland values.
Charles Gilliland, land market expert at Texas A&M’s Real Estate Center, said there is a shortage of property listings, and prices continue to hold up well. The market for rangeland is particularly strong, and cropland sales are active.
Recreational land sales still dominate in many parts of the state, but he adds recent large livestock operations that have sold weren’t primarily recreationally driven.
“We have one percolating on the horizon, the Waggoner Ranch, in north Texas, which is 510,000 acres under one fence. It crosses six counties,” he said. “That will certainly augment supply. I understand there’s a $725 million asking price on it. It will sure be interesting to see who pays that much.”
Texas is in the throes of another booming energy era, currently pouring billions into the economy. Gilliland said more than a little of that money is looking for a home in the Lone Star state’s land market.
“There seems to be a real interest in getting hard cash into hard assets that will preserve value,” he said. “There is no sign of land prices leveling off. If anything, they are going up faster than they have in the last couple of years.”
Gilliland’s observation that cash is still actively looking for a home in the land market is at the bedrock of the long-term gains seen in many areas. In Texas, that cash has flowed from the oil fields, while across the Midwest, it’s flowed out of
grain bins and cow herds.
Murray Wise, founder of Murray Wise Associates, based in Champaign, Ill., said there is still no better place for that cash than farmland. He has certainly helped rehome more than a few dollars over his career, noting the company has sold more than $2
billion in property during the last 20 years. Wise has seen the highs and, more importantly, the lows. He’s still seeing no signs that this land market is going to be taking any more than single-digit corrections for the next year.
“The land market today has more support than it normally would as an investment thanks to the low interest rates,” he explained. “I haven’t seen a financed farm in years. Every sale I’ve been part of has been a cash sale, and most are going to farmers.
“Think about the alternative investments out there,” he continued. “Do you go to the local bank for a CD? Do you buy into stocks? Do you look at bonds? I think a lot of people still feel land, even at these prices, offers more stability.”
Wise defines today’s Midwest land market as “confused.” There are some townships where values are above year-earlier levels and others where values are lower. It depends on who the neighbors are and whether they are in the market for land.
Remarking on how quickly the market is changing, Wise related a report of a land sale north of Marcus, Iowa. The good, well-drained cropland sold for $11,600 an acre. This was $2,400 an acre less than the pool at the local elevator was projecting of
$14,000. A farm across the road had sold for $15,000 an acre a few months earlier. The sale was well attended, he adds, with the usual area buyers on hand. Wise said this is an example of the confused state of the market. He expects more clarity by spring.
“I think this winter there is going to be some major upheaval when it comes to renewing cash leases. The farmer wants lower rents; the landowner wants the same rents he’s gotten the last two years. Until that shakes out, it’s hard to put your arms
around where the marketplace is going.”
Dale Aupperle has his own opinion about where the land market is going.
“This is a true sideways market in every sense of the word,” said Aupperle, president of Heartland Ag Group, Forsyth, Ill. He added there is a certain comfort in a sideways market given how fast prices climbed to get to this level.
“Since December 2012, the Illinois farmland market has gone sideways to just slightly lower. The fact that we’ve had close to two years of basically sideways price action means we’re finding a comfort level. There is now a feeling that this price level can be maintained, and we’re not headed to some big drop in land values.”
Aupperle said the amount of land available for purchase is stable, and farmers are absorbing most of the local tracts that come onto the market. Investors are mostly sidelined, waiting to see if lower farm income brings down land prices.
“The farmer is different,” Aupperle said. “The farmer is locationally sensitive. If a tract he wants to add to his portfolio comes up, he’ll probably never see it again, so he’ll buy it. That shows you the locational influence on farmland deals right now. He won’t let a locationally correct deal get away. There is no wait and see.”
The latest report from the Illinois Society of Professional Farm Managers and Rural Appraisers shows 71% of farmland sold during the past year went to farmers. Cash was still king in those transactions. However, Aupperle said with the anticipation of higher
interest rates, some managers look to borrow long-term money and keep cash liquid, assuming debt is part of their plan.
Lower commodity prices, he added, may not be the blow to the overall farm income that many people anticipate. He contends farmers are going to be making their money on bushels in the future, not on price per bushel.
“I just don’t think farm income will fall as dramatically as some have projected,” he said. “I don’t think people realize what the new normal is, because we’ve had three or four rough production years. There is a new normal corn yield, and I think that’s around 225 bushels per acre in Illinois, thanks to genetics and improved farming capabilities. That changes the equation. And that changes
farm values. Tell me what today’s farmer’s earning stream is going to be like, and I’ll tell you the value of the land.”
If earning streams are the true key to land prices, there will continue to be great disparity. Aupperle’s anticipation of 225-bushel corn yields may be the outlier. USDA’s September 2014 report projected 172 bushels as the national average per-acre grain corn yield. This includes averages in states like North Dakota, at 132 bushels, to Illinois, with 184 bushels. Such averages point to quality and location as key pieces in the puzzle to establish a price for America’s cropland.
When setting the right price, it also helps to know who’s in the market and how long they may have been waiting for an opportunity to make just the right purchase. In fact, when all is said and done, that might just be the most important thing of all.
“With land, there’s availability and there’s price,” Bunselmeyer said. “And then there’s something else that’s a little harder to put a number on. It’s when that piece of ground you’ve had your eye on for a long time comes onto the market, and you know that it may never happen again in your lifetime. In a case like that, price is not as important as acquisition.” ???
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