Farming and Ranching

Jennifer Banks: Commodity prices falling, but farmland won’t follow

Controller and financial analyst, Scythe & Spade Co. in EagleJanuary 15, 2014 

The past 10 years in agriculture have seen farmland values double and agricultural product exports grow to a record high of $141 billion. Global demand for U.S. exports forced the prices of many commodities to increase substantially over the past decade. This increase, coupled with an environment of low interest rates, has favored farmland real estate values. From 2012 to 2013, farmland values in the United States rose 9 percent, driven primarily by states in the Midwest. Although value appreciation in the West has not been so dramatic, we have seen substantial annual increases of 3 percent to 5 percent over the past several years.

When contemplating the economic variables at play in the agriculture industry, we start with commodity prices. Land values are inherently tied to the income-producing ability of the asset. Farmers who lease their ground from property owners can afford to pay rent per acre based on the gross income they expect from their crops. That income is directly related to the market price of the commodity they produce.

The 2014 outlook for the commodities markets is neutral to bearish. Corn prices, which drove Midwest values so high over recent years, have dropped due to lower demand for corn and corn-based products (ethanol). The trends in corn affect grain prices as well. Lower prices for grains are also the result of increased world production of wheat.

Fiscal 2014 agricultural exports are forecast to be $3.9 billion below 2013 due primarily to lower unit values for wheat and certain feed products. U.S. agricultural imports are forecast to be higher than 2013, resulting in an agricultural trade surplus that would be the smallest since 2009.

The Farm Bureau of America reports that a decline is ahead in farm income that will translate directly to farmland. Larry de Maria, an analyst with William Blair & Co., notes an “impending cyclical downturn due to lower commodity prices, international competition and lower exports.”

According to William Blair estimates, U.S. cash crop income could fall 11 percent in 2014 and an additional 2 percent in 2015. These declines will affect the underlying real estate and slow the growth trend of farmland values.

Historically, investments in farm ground are not as volatile as the underlying commodity markets or the commercial and residential real estate markets. Many investors have been attracted to agricultural real estate because of its consistent overall yield and low correlation to the securities markets. Land areas for farming are fixed — supply is not going to increase. However, population growth continues, and everyone needs to eat. There continues to be a high demand for top-quality ground that is in limited supply. This competition in the higher echelon will keep values stable even as commodity prices become bearish.

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