Land prices slightly down, but there is light on the horizon

    While farmland prices have dipped lately, experts Kenn Corban, Roger Hayworth and Eric Wilkinson at The Chicago Farmers’ April 11 meeting said that it is not a dour situation.

    In the last six to eight years, farmland owners experienced increasing incomes, but this situation has taken a downturn with the decreased prices of commodities. However, this period is not in the same category that was prevalent in the 1980s.

    “Farmers have to adjust to today’s climate by making some changes in their expenses,” said Kenn, RVP of field operations for 1st Farm Credit Services. “In our firm’s experience, we have seen approximately 30 percent of farm operators who had significant losses in their working capital in 2015. This group knows that changes have to be made if commodity prices stay at or below where they are now for awhile.”

    Kenn noted that while there was a portion of farm operators who had significant losses in 2015, there also were people (20 percent) whose working capital had manageable losses and others (50 percent) either had minor losses or increased working capital. He related that decreasing corn and soybean prices in 2015 resulted in a 35 percent drop in revenue. At the same time, costs were not adjusting as quickly as prices were dipping. “While we have seen cash positions of some operators drop, there is still significant equity and ways operators can manage through these times,” said Kenn.

    Eric, of Hertz Farm Management, Inc., agreed with Kenn’s analysis, noting that cash rent prices are down along with incomes. At the same time, seed and chemical costs are slowly coming down, giving farmers something positive to embrace.

    “There are still a great number of farmers who are financially sound and in a good position to absorb losses,” said Eric. “They can sustain their positions for one or two years, but not too much longer. Cash rents will be under pressure.”

    He went on to say that some landowners are protecting themselves against losses by shifting away from split rental payments to upfront payments at the signing of leases.

    Roger, real estate broker with Farmers National Company, covers a wide swath of territory that includes portions of Missouri, Arkansas, Kentucky, Indiana, Illinois, and Michigan. He related that he is seeing a decline in the market place in land prices during the last six to nine months. “It has been a sellers’ market for the past five years, and that is changing. However, there is little correction in the sale of high quality property. We are still experiencing strong sales. Regarding B and C soil land, sale prices are down eight to 15 percent.”

    He went on to say that buyer interest is fairly high, but buyers are being cautious at land auctions and during negotiations. “Landowners were buying acres with the additional income they had. That scenario is slowing a bit, yet they still want to add acres to their holdings.”

    Roger added, “There is a limited supply of land. Sales are stagnant across the eastern region of the area I cover. Additionally, many believe that interest rates will rise, which will put pressure on land prices going forward.”

    This market also is seeing internal trading, said Roger, because many farmers are interested in bringing their acreage closer to their home base. He also said there is a higher influx of 1031 exchanges.

    “The media also are playing a role in exacerbating people’s worry about the current situation by likening it to the 1980s,” said Roger. “That is not the case. Farmers are less in debt today. Things go through cycles, but we are not at doom’s day level. Things will go up. We need food. We will move forward.”

    In response to an audience member’s question, Eric noted that prices largely are being affected by the worldwide over-supply of commodities. “There are large stockpiles of corn and soybeans. Until we eat through that stockpile, prices will remain constant or dip a little.”

    The men observed that banks foresaw what is happening today and were proactive in their business decisions.

    “The large (banking) concerns are conservative and are making loan decisions on a case by case basis,” Roger said. “They are concerned about their bottom line, but money is available.”

    Kenn added, “If you (farmland owners) are conservative when things are good, you have more equity when there is a problem.”

    Regarding land purchases by investors, Eric said that farmers are driving the market with 80 percent of the sales involving active farmers. Roger agreed and said that investors try to be more aggressive, but the majority of land sales are local farmers who want to control acres.

    Other points:

    • Foreign investors are not a key component in buying farmland in the Midwest.
    • Farmland REITs seem to be making a big splash on the market, but are not influencing it. Yet, they are well diversified and worth watching.
    • Insurance coverage has not changed with 85 percent revenue protection for corn and soybean operations.
    • There seems to be more sale listings today versus land auctions.