AGVIEWS
— BY LYNN PAULSON Bell Bank Director of Agribusiness Development
Are the Tops in With Farmland Prices?
With all the happenings in the agricultural world these days – higher interest rates, commodity price volatility, uncertain weather outlook, a new farm bill being debated, and so much more – the one topic that seems to be on everyone’s mind more than any other is the unprecedented run-up in land values over the past couple of years.
So, have we seen the highs – at least for now?
To learn more about the current state of farmland, including trends and how they compare to past cycles, I reached out to four well-respected, seasoned professionals in the farmland market for their opinions. Kevin Pifer of Pifer’s Auctions, Scott Steffes of Steffes Auctioneers, Dale Weston of Farmers National, and Lindsey Brown and Steve Bruere of Peoples Company had some excellent insight and opinions. Often, the conversation around high land values will be about the inability of the land to cash flow based on the high prices. The reality is, in most cases, it’s not future cash flows that are relevant – it’s the past profitability that is paying for most, if not all, of the purchase.
It’ll be interesting to watch the amount of farmland that comes on the market in the next few months and years. It’s been estimated that well over 100 million acres of farm real estate may be sold in the next decade. Most of the sellers will likely be family members who have limited connections to the land and are inheriting the land from previous generations. No doubt, it’s easier to divide cash than it is to divide land.
WHAT DO YOU SEE AS EXPECTED PRICE TRENDS FOR FARMLAND IN THE NEXT 12 MONTHS?
Kevin Pifer (KP): The farmland market continues to show remarkable signs of resiliency, and unprecedented territory for land values. It appears the market will continue to be strong throughout the balance of 2023 and early 2024.
Scott Steffes (SS): It’s going to be hard to convince me land values won’t retract considering the math problem current interest rates are creating. The exception, as always, will be the highly productive, highest quality dirt, which seems to stay steady, go up or simply not be for sale when there is a retraction.
Dale Weston (DW): I believe we are in a plateau right now. I have not seen any evidence of land going up or down, but it really feels like late 2013 or early 2014 to me.
Lindsey Brown and Steve Bruere (PC): There will be some pressure on land values over the next 12 months as the cost of capital impacts leveraged buyers. As you eliminate leveraged buyers from the market and you give investors alternatives, it’s bound to impact values.
WHAT’S DRIVING THESE TRENDS?
SS: I would say a more normal lack of exuberance or urgency that drove operators to get aggressive on buying with more cash available than they’ve ever experienced.
DW: I think lower commodity prices and higher interest rates have caused some pause in the spending for land. Any area that has not had a public sale in many years typically has the potential to blow the top off because of pent-up market demand. There is still a lot of cash out there. The debt-to-equity ratios are still really good. There are still people with dry powder.
KP: Continued strong commodity prices, particularly in the livestock sector, and an enormous amount of cash in the pipeline from producers and investors. The cash in the system is eroding daily with inflation, and likely in early 2024 the landscape for purchasing land may change as debt-to-asset ratios increase.
PC: Over the past two to three years, investors were satisfied with a 2.50% to 3.50% ROI. Now, with the elevated rates on deposit accounts and short-term investments, investors are able to find other investments that will yield 5% to 6%.
HOW IS YOUR COMPANY’S PIPELINE FOR UPCOMING FARMLAND SALES LOOKING FOR THE NEXT 6 TO 9 MONTHS, AND HOW DOES THAT COMPARE TO PREVIOUS YEARS?
DW: It is consistent-to-lower than two years ago and similar to last year. We are probably down on listings from two years ago by 15-20%.
KP: Pifer’s farmland inventory is the highest in the final four months of the calendar year in its nearly 24-year history, and nearly 10% above previous years.
SS: I’d say we’re returning to a more normal and long-term healthier market.
PC: High-priced land brings land to the market. With that said, there is a fair amount of anxiety in the market right now. We are estimating our volume will be off 40% yearover-year.
WHO’S SELLING?
KP: Baby boomers who have inherited the land continue to be the largest block of those selling farmland.
DW: Most of my sales are typically generational landowners who have recently inherited land from parents and do not live in the immediate area.
SS: The usual suspects: Families in transition due to retirement or estate on land.
PC: Estates, trusts and investors taking profits. As the younger generations inherit the farmland, those family members who are not actively farming look to market the land to take advantage of the high prices and maximize the sales value.
WHO’S BUYING?
SS: In real estate, the best buyer has been and always will be the neighbor. Investor interest is still there, as farmland still looks good compared to the alternatives, but at a stronger discipline for better returns.
DW: I still see a large number of farmer buyers. It seems the investor buyers I deal with almost always have a connection to where they are buying as well (maybe they grew up there and moved away, or still have family in the area).
KP: Farmers and ranchers represent nearly 80% of all Pifer's buyers today, while the balance are investors. This has shifted by about 5% more toward farmers and ranchers purchasing land in the past 12 months.
PC: Farmers and investors with an inflation thesis. We’re seeing a ratio of 60% farmer buyer to 40% investor buyer at this time, but that may change to 50/50 or 60% investor to 40% farmer buyer if the interest rates stay up.
ARE HIGHER INTEREST RATES INFLUENCING LAND VALUES?
KP: Surprisingly, the highest interest rates in 22 years have not affected land values. It does appear, however, that 20% of all land buyers are standing on the sidelines waiting for the Federal Reserve to pivot and begin lowering interest rates. This likely will not happen until mid-2024 or later.
SS: No question. Without a doubt. Understand, however, that land historically goes up very fast but corrects very slowly. Instead, sellers dry up unless there is some highly
motivating circumstance like a death or multiple owners going in different directions. Worst-case scenario, it would be financial pressure like what happened in the 1980s, but we’re not in that environment nor do I see it heading that way.
DW: Yes, I think interest rates have to affect land-buying decisions. What I have heard from lenders is the cash positions for most farmers are still really good. But, land rents have gone up dramatically. With the lower participation of bidders in the sales I have followed, I have to believe that interest rates have to be a part of that.
PC: In Minnesota and North Dakota, farmland prices are slowing and starting to show the effects of higher interest rates, but overall, farmland as an inflation hedge and high commodity prices have kept farmland from suffering from higher rates. Land values are still strong but are down approximately 5% to 8% depending on the area and quality of the land. As inflation levels off and interest rates stay high and commodity prices dip, I think you’ll see interest rates impact the market more.
Takeaways
AgViews Live, Bell Bank’s 8th annual ag conference, again drew record numbers of attendees in Fargo, Sioux Falls and Wisconsin Dells. Producers and others in agriculture and agribusiness gathered to learn from Dr. David Kohl, an author and national speaker on agriculture and the economy, and Lynn Paulson, Bell’s director of agribusiness development.
Here’s a list of the top 10 takeaways from this year’s conference:
Success can sometimes mask management shortfalls. Even if you’re in good financial shape, continue to carefully monitor liquidity, cash flow and profitability. Understand where your debt is concentrated and where your dollars are going in the years you make them.
2
Globally, countries like China, Russia, India, and the NATO/European bloc have impact.
China has seen a sharp slowdown in economic growth, with household debt-to-GDP similar to that of the U.S. during the 2008 financial crisis. India, which has surpassed China in population, will be the world’s third-largest 1
Manage the controllables, and manage around the uncontrollables.
economy by 2029. Europe is 20% of the world economy –and both Germany and the European Union are now in a recession.
Monitor megatrends and disruptors.
Today’s “hot topics” – such as cryptocurrency, artificial intelligence (AI), ESG (environmental, social, governance) movements – all can become “black swan” issues with major consequences. Manage your operation toward maintaining resiliency, agility and nimbleness to better absorb shocks and proactively position yourself for the opportunities that will also arise.
Watch the dollar in light of developing new global banks and currencies.
The New Development Bank (headquartered in Shanghai) and Asian Infrastructure investment Bank are designed to reduce nations’ dependence on dollar-based funding. Their impacts have yet to be fully realized, and the U.S. needs to avoid “weaponizing” its currency.
Prices continue to be volatile.
Prices are affected by geopolitical agendas, deglobalization, trade policies and more. Interest rates also have doubled in a year, and with still-sticky inflation, now may be the time to consider alternative investments such as CDs and Treasury bills.
Commodity prices today are often lower than the cost of production.
With both corn and beans now at $5 and $13 or less a bushel, farmers need to manage the risk. Commodity markets likely will force out inefficient producers. Global competition and trade policies are also key factors.
Higher expenses outlast higher incomes.
Margins are becoming tightly compressed in this economy. Even producers who are seeing higher incomes are also seeing higher costs from lenders and vendors. More risk is often taken when more money is being made, so don’t get greedy – or complacent.
Farm and ranch land is the ultimate asset.
Farmland is greater than 80% of assets on farm balance sheets, and that allows farmers to leverage opportunities for growth and expansion. Farmland ownership is in pretty tight hands, with active farm producers still the primary buyers of farmland. Record high sales prices may be leveling off, but no price bubble is expected. Longtime landowners should make sure they’ve planned for transitions to the next generation to avoid unintended consequences of unearned wealth – as well as family disagreements over long-held property.
Rated red, yellow or green.
Looking at 10 leading economic factors, half are still warning of a recession or at least a downward trend, with housing starts, unemployment, factory utilization and federal debt all “green.” Producers and others should look at their own “green/yellow/orange/red” assessment to see where they fall in being a little better in many to a few components of operation.
8 9 10
Handle “hard” better … 5% better.
Whether you’re a producer or engaged in another aspect of agriculture, it’s good to look at how your operation has fared in good times and bad, and what conditions you need to navigate in order to handle “hard” better. Opportunities for prosperity are about being just 5% better in components such as production, operations, marketing, risk management and finance.
