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Land Trends and Values

Farmland value is the barometer for the health and wealth of the farming economy, said Eric Wilkinson, of Hertz Farm Management, Inc., during his presentation on land trends and values at the Chicago Farmers’ April 4, 2022, meeting.

Wilkinson said values have been flat since 2014, with the last high from 2011-2013. However, the market began “to come alive again” in the fall of 2020 and the market has been trending upward since the fourth quarter of 2020. “In general, everything is up significantly,” Wilkinson shared.

He went on to say that the Chicago Federal Reserve survey of “good” farmland in Illinois, Indiana, Iowa, Michigan and Wisconsin increased in dollar value by seven percent from October 2021 to January 2022, and from January 2021 to January 2022 it increased 22 percent.

In 2021, Illinois Society of Professional Farm Managers and Rural Appraisers indicated that excellent land increased in value by an average of 26 percent; good land, 24 percent; average land by 21 percent; fair land, five percent; and recreational land, 11 percent, Wilkinson said.

Wilkinson also said there is a direct link between the price of corn and soybeans to the cost of land. If the costs of commodities rise, then farmland values rise.

Wilkinson said that the farm economy is expected to slow in 2022 with the net farm income forecast to be at $114 billion from $123 billion in 2021. Many government payments are ending, such as the Market Facilitation program and other ad hoc government programs. At the same time, crop insurance is an important factor in a farmer’s income. He noted that 160 million acres of corn and soybeans are covered by crop insurance and 200 million acres of wheat are covered.

Rising interest rates also are expected to affect the market. Since the start of the pandemic, rates have been extremely low, but they are rising. However, last week Hertz closed a loan with a rate of 4.5 percent on 20-year amortization. Wilkinson said that interest rates are still historically low, and this has helped to fuel the market. “The downward rates are still present,” he noted. “It is going to be hard to get used to higher rates.” Wilkinson observed that bank repayment capacity is good, and lenders are lending.

What is driving this market? Wilkinson said the main drivers are commodity prices, farm income, government support, interest rates, borrowing capacity, and land sale volume. “All major drivers aligned simultaneously,” he said.

Active farmers represent 60 to 80 percent of farmland buyers. Other buyers include local investors (attorneys, accountants, teachers), non-local individuals, institutions, and newer institutional investors, such as Crowd Funding, which allows individuals to buy shares of a farm, according to Wilkinson.

Regarding farmland’s financial performance, Wilkinson said it performed well versus the stock market from 1990-2020. He said there was very little down-side risk for farmland, even when the economy was down.

He noted that in a Purdue University study regarding the ag economy barometer, attitudes improved quickly. “Farmland value is just as much attitude and emotion as it is about data,” Wilkinson remarked. The survey found that since 2016 there has been some optimism. Attitude fell in 2020 due to the pandemic, but it tended to rise in 2021 due to growth and government support. Optimism is decreasing due to higher input costs, government policies, and the looming effects of Covid.

However, most farmers think the ag economy will be stable to higher after 2020. In five years, most farmers think farmland values will be higher.

Regarding long-term value expectations, the thought is that non-farm investor demand and inflation will drive this.

Farm rental saw an increase due to higher income. Although farm income is forecast to be down from 2021, 2022 could still be a very profitable year and cash rents are forecast to continue to increase. Wilkinson said the strength in the farm income in 2021 will drive the 2022 cash rent and 50 percent of farmers thought there would be an increase in cash rent and 50 percent thought it would remain stable, which generally means that the rental market will be stronger.

What are the effects of the Russia-Ukraine war on agriculture? Wilkinson pointed out that 70 percent of Ukraine land is devoted to farming and Ukraine ranks first in the production of sunflower seed, sixth in corn and barley, seventh in rapeseed, and ninth in wheat and soybeans. In global exports this year, Ukraine is predicted to account for 19 percent of rapeseed, 18 percent of barley, 16 percent of corn, and 12 percent of wheat.

The United States is dependent on imported fertilizers:

• Nitrogen, 12 percent imported: Trinidad and Tobago (65 percent), Canada (30 percent), Venezuela (3 percent), other (2 percent)
• Phosphate, 9 percent imported: Peru (85 percent), Morocco 15 percent)
• Potash, 93 percent imported: Canada (83 percent), Russia (6 percent), Belarus (6 percent). other (5 percent)

What to watch in the coming months…

• Commodity prices, 2021 peak in May/June. What will happen this year?
• Interest rates and inflation. How hard will the Fed push rates?
• Sales volume. It was way up for the third and fourth quarters in 2021. Will there be more and can the market strength hold?

In response to a question on drought, Wilkinson said that the market will be paying attention to the growing conditions in the United States and South America; a drought will make the market more volatile. Regarding CRP (Conservation Reserve Program) contracts, Wilkinson said that a significant acreage is expected to come out of CRP and not renew. “The trend is away from CRP,” he said.

Regarding a question on cash-rent, Wilkinson said the rate varies greatly. He said that many farmers made more than the cash rent they paid in 2021, due t good yields, high commodity prices and low input costs. Wilkinson added that while the forecast for 2022 is that income may  be lower than 2021, it should still be a profitable year.

Chicago Farmers Learn About the Workings of the CME Group

Makenzie Billings, manager, CME Livestock and Alternative Investment Products, and Josh Kravitt, director, CME Ventures, were the guest speakers for The Chicago Farmers March 14^th webinar. They presented an overview of the workings of CME.

In discussing futures, Ms. Billings related that people seek out the CME to manage price risk and engage with people. She noted that a futures contract is a legal, binding agreement facilitated through an exchange and clearing house. Futures deal in such areas as agricultural commodities, energy, fixed income, stock indices, foreign currency, and metals.

Giving a brief history of the futures industry, Ms. Billings said that Chicago became a key spot for people to gather in the, 1800s because of the access to the Great Lakes and railroads. During the 1800s, agricultural producers and consumers were subject to drastic seasonal food supply fluctuations and inconsistent, chaotic prices. At the same time, commercial agricultural hubs came into being as the American Industrial Revolution took hold and infrastructure grew. The Chicago Board of Trade (CBOT) was formed in 1848 as a central grain exchange allowing producers to sell their crops at set prices and consumers to purchase at transparent pricing throughout the year. The first forward contract on corn was written on March 13, 1857. The CBOT introduced standardized futures contracts in 1865. Corn, wheat and oat futures were introduced in 1877. The Chicago Produce Exchange established a dedicated cash butter and egg trading exchange, with defined product grades and rules of trade. To ensure quality, each keg of butter was individually smelled and tasted on the spot and a price was agreed upon. Surplus butter was salted and stored in the basement for future sale, which drove the introduction of the ‘time contract’ in 1882.

Over the years live cattle and live hog futures contracts and a feeder cattle contract and silver futures were added. The International Monetary Market, a division of the CME, was formed in 1972 to offer seven foreign currency futures contracts. In 1992, CME introduced CME Globex for electronic trading and to provide 24-hour access to all CME Group products.

Ms. Billings discussed the importance of the Exchange and a Clearing House. She said an exchange is a central marketplace where futures contracts and options on futures can be traded. It provides a facility and trading platform that can be either physical or electronic. It brings buyers and sellers together and establishes and enforces rules to ensure that trading is open and competitive.

A clearing house is an agency or separate corporation responsible for clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading activities. Some clearing houses become the trade counterparty between brokers and, therefore, become the buyer and guarantees the trades, such as CME, CBOT. Ms. Billings related that in a live contract, such as a cattle contract, the CME sets the rules for delivery and the USDA oversees the delivery process. She noted that the majority of contracts is cash settled with only about three percent being physically delivered.

In agricultural options on futures contracts, the contract is sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation to buy (call) or sell (put) at an agreed-upon price (the strike price) during a certain period of time before or on a specific date.

She said that options are often equated to insurance. There is a premium (the cost of putting on the positon) to get protection. If the futures price moves favorably, the option position is not exercised and the holder of the option loses the premium. If the futures price moves adversely, the option position automatically exercises and the holder is given the futures position specified by the option.

The CME’s total average daily trade volume today is around 27 million contracts; the agricultural product’s average daily trade volume is around 1.6 million contracts. Regarding average open interest, which is the average total number of open futures contracts held by market participants at the end of the trading day:

• Across all asset classes, about 105 million contracts
• Agricultural produces, about 8 million contracts

Ms. Billings said that the people who come to the CME either financially back themselves with large capital requirements or are backed by a Futures Commission Merchant (FCM) who also has a capital requirement based on the amount of customer funds they hold. With this structure, along with the clearing house model, there has never been a trade default in the history of the exchange. She said the National Futures Association ensures that all regulations of the Futures Commission Merchants are followed.

To add to these protections, she said the National Futures Association (NFA) then ensures that all regulations determined by the Commodity Futures Trading Commission (CFTC) are followed. Further, exchanges have their own market regulation departments to ensure the rules of each market are followed. There are strict processes for addressing those who do not adhere to the rules and regulations.

Mr. Kravitt discussed CME Ventures (CMEV), which is the corporate venture capital arm of the CME group. He explained that CMEV comes across thousands of startups raising capital – across FinTech, AgTech, and other sectors. Mr. Kravitt said the group serves as the bridge between their external network that touches the private markets space and CME’s internal business lines, such as their agricultural business line. The team’s primary objective is to unlock long-term growth opportunities for CME. He relayed that CMEV provides insights into:

• Industry trends
• Problems being solved
• Where capital is deployed

CME Ventures receives “inbounds” from their vast external network, bankers or brokers that represent private companies, and from colleagues internally at CME. An inbound is a startup that is raising capital to pursue growth. Once an inbound is received, it is categorized. CME Ventures then vets the potential strategic value of a select few through pilots. If successful, CMEV may pursue partnerships and/or minority investments with the specific company.

Networking with companies that touch agriculture and colleagues provide the names of companies that are potential “inbounds.” Once a company has been identified, it is categorized, and its partners and strategic opportunities are vetted through pilots. Then, CMEV pursues partnerships and minority investments.

Mr. Kravitt said that CMEV has received more than 100 ag-related inbounds since early 2020, tagging notable companies across the following categories:

• Emerging PRAs and Spot Platforms, which encompasses organics and non-GMOs, hemp and cannabis, ingredients, water, and life sciences
• Index linked risk management, such as commodity risk management and climate-related insurance
• Carbon sequestration and regenerative agriculture, which includes MVR/Data Providers, ecosystem services markets
• Supply chain traceability using blockchain technology
• Farming operations and supply chain management
• Farmland as an asset class

Mr. Kravitt said that according to Pitchbook, there has been 40 percent annual growth in the venture capital investment in AgTech since 2012.  While the carbon farming space has seen tremendous recent growth, it still only represented less than two percent of overall investment in the AgTech space in 2021.

Mr. Kravitt briefly walked through current AgTech unicorns (AgTech startups with a valuation greater than $1 billion). These unicorns are offering solutions that fall across three broad buckets – sustainability and climate, supply chain challenges, and farmer productivity and profitability.

He went on to say that shifting consumer preferences plus technology, regulatory, and environmental factors are transforming the Ag industry. Mr. Kravitt identified four main takeaways in terms of where the space is moving:

• The continued acceleration of data and digitization tools to drive profitability
• Improved access to markets, physical supply, and better risk management tools
• The trend towards differentiated commodities
• Outsized growth in select product areas, such as alternative proteins, hemp and cannabis, organics, and micro-ingredients (vitamins, minerals). He said growth is expected in this category.

The above takeaways are driven by shifting consumer preferences, advances in technology, the shifting regulatory environment, and the implications of climate change.

In response to a question, Mr. Kravitt said that there are many challenges that are preventing wide-scale adoption in the regenerative agriculture/carbon farming space, including the concepts of additionality and performance. Challenges also exist on the measurement verification side and there is a lack of regulation and clarity. He said that farmers ae also questioning the economic benefits of transitioning to regenerative ag practices.

In response to another question, Ms. Billings explained that in forward contracts a producer selling a cattle feeder, for instance, is not backed by anything. A futures contract is standardized and the clearing house is between the buyer and the seller so that the counter party risk is minimized.  

Ms. Billings and Mr. Kravitt said that CME is a global company, with customers across Asia, EMEA, Australia, and Latin America.