"What’s Supporting Farmland Values?"

This is the second part (of two) from Agricultural Economic Insights, January 29:

In a recent article on land values, we began the discussion by examining cash rental rates and farm financial conditions. This week we look at farmland valuation
  
Current Valuations Remain High
Because of our belief that farmland prices are ultimately driven by earnings expectations and opportunity costs we frequently examine farmland valuation with the farmland price to cash rent multiple.  This expresses farmland price as a multiple of current cash rents.  In other words, if the multiple is 25, farmland is priced at 25 times that current cash rental rate.  This valuation measure is shown in Figure 1.

Figure 1.   Cash Rent to Value Multiple, Average Quality Indiana Farmland, 1975-2017.

According to the Purdue Farmland Value survey, the 2017 cash rent multiple for average quality Indiana farmland was 34.  This meant that average quality Indiana farmland was currently being valued at 34 times the cash rent.  As one can see, this is among the highest multiples seen in the data, but off slightly from recent highs.  While this graph is made from Indiana data, similar multiples would be seen in the USDA data for most corn belt states.  The essential point is pretty clear.  Today, investors are willing to pay more for current earnings than at most times in history.

There are a variety of reasons that one might be willing to pay a high multiple.  First, you might expect that these current earnings will grow in the future.  For instance, if you expect cash rents to grow rapidly, paying a high multiple for today’s earnings would be sensible.  However, as we discussed two weeks ago, current economic conditions don’t suggest that rents will be increasing rapidly in the near future. In fact, they have been trending slightly lower.  However, one must remember that conditions can change rapidly.  Perhaps investors expect that earnings will increase in the future.

Interest and Capitalization Rates Remain Low
Another reason that people are willing to pay a high multiple for farmland is that the other options available to them are not attractive either.  We often examine this by looking at interest rates on alternative investments as a proxy for opportunity costs.  If the opportunity costs for capital are low, investors are often willing to accept low rates of return on farmland.  This is best seen by taking the inverse of the multiple, which is commonly called the farmland capitalization rate.  It is calculated by dividing cash rent by farmland prices.

In figure 2 we show the capitalization rates for farmland in three different states and the interest rate on the 10-year U.S. Treasury bond.  The farmland capitalization rates were calculated from USDA surveys in Indiana, Illinois, and Iowa.  The chart shows that since roughly 1985, farmland capitalization rates and U.S. Treasury bond rates have fallen.  Today, farmland capitalization rates are slightly higher than the interest rate on 10-year U.S. Treasury bonds.  This strong relationship provides fairly strong evidence that the high multiples paid for farmland are a function of the generally declining interest rate environment of the last 2 to 3 decades.  In other words, it appears that one reason capitalization rates are low (and conversely multiples are high) is the overall low interest rate environment that we are experiencing.

Figure 2.  Farmland Capitalization Rates and the Interest Rate on 10-Year U.S. Treasury Bonds, 1967-2017.

How Might Changes Impact Farmland Values?
Another way to look at the relationship between interest rates, returns, and farmland value is to examine them simultaneously.  This relationship is shown in Figure 3.  Here, we graph farmland value on the vertical axis.  Along the horizontal axis are different cash rent values.  The red, blue, and green lines farmland values under different capitalization rates. These values are found by dividing (multiplying) the cash rental income on the horizontal axis by the capitalization rate (multiple).  Three capitalization rates 3% (blue), 4% (red), and 5% (green) are shown.

The black lines (which are labeled) illustrate the current level of cash rent and farmland values.  As one can see the current land value and cash rental rate intersect the 3% capitalization rate ($6,928/$205 = 3%).  One can use this graph to think about what would happen if capitalization rates or cash rental rates were to change.  For example, if one were to expect higher (lower) rents and a 3% capitalization rate, land values would move up (down) the blue line....MUCH MORE

Earlier:
What's Supporting Farmland Values? Part 1 

Grantham, Mayo, Van Otterloo: "A Farmland Investment Primer"

From Grantham Mayo Van Otterloo:

July, 2014 White Paper
Julie Koeninger
Farmland is a real asset that combines solid investment fundamentals with the potential for attractive cash yields, inflation hedging, and consistent returns from biological growth. Furthermore, farmland total returns tend to be uncorrelated with financial asset returns, offering genuine portfolio diversification for institutional investors. While institutional ownership within the asset class has grown steadily over the past few years, it still accounts for less than 1%¹ of total global agricultural land ownership, presenting significant opportunity for sustainable yield enhancement through targeted farmland investment in certain regions.

The pages that follow present an overview of the key characteristics and potential risks of farmland investing, consider the routes for implementation, and make the case for a diversified, cross-regional approach to the asset class.

Farmland Investments Defined
Farmland investments consist of direct investments in rural land along with crop and livestock assets that produce food, fiber, and energy. Farmland investments focus on the productive capacity of the land base, and returns are based on the biological growth of crops and livestock, as well as appreciation of land and related assets. By their nature, farmland investments are long-term illiquid investments in real assets.
Investments are grouped into three general categories:

1.Row crop investments include annual crops such as corn, soybeans, cotton, wheat, and rice.
2.Permanent crop investments include perennial crops such as fruit and nut crops, which have both pre-productive and mature periods. Pre-productive or “greenfield” investments where trees or vines are planted on bare ground have a “J-curve” return profile. Some mature permanent crops, like almonds, peak in productivity and then decline, so orchard age is an important factor in estimating productivity and value.
3.Livestock investments include land leased to local operators for grazing or direct livestock ownership and operation.

Institutional farmland investing typically focuses on globally competitive agricultural sectors including:
■Corn, soy, wheat, rice, and other bulk commodity row crops that can be produced most efficiently at scale.
■Relatively storable permanent crops such as nut crops or wine grapes.
■Large-scale livestock production, including dairy and beef cattle operations.
Efficient global producers, such as U.S. corn, soybean, and nut crop, New Zealand dairy, and Australian beef producers, benefit from participation in export markets, and receive a globally determined price for their output.

Management Style: Leasing vs. Direct Operation
In many regions of the U.S. and some other parts of the developed world, row crop properties can be leased to high- quality local farm operators at fixed or variable rents that provide attractive yields to the investor. These farmers leverage the scale and productivity of their operations by owning some land, but also leasing land from investors in order to maximize their return on investment. In other geographies lacking a robust farmland rental market, particularly in developing regions, a lack of leasing demand from qualified farmers makes direct operation the best approach to maximize returns. In direct operation, the farmland investment manager employs a farm manager to operate the farm. While direct operation involves a higher risk/return profile because the investor assumes both price and yield risk, it is often the preferred management style for permanent crops and livestock as it ensures that the long-term asset is well-managed and value is maintained.

Property Management
Like most real estate investments, farmland investment requires specialized property-level management. While more intensive property management is required for direct operations, property managers also provide critical oversight of tenants operating leased farms. Property management may be vertically integrated with investment management or outsourced to third-party providers. Outsourcing allows the investment manager to hire the property manager best suited to manage each type of investment in each region and can be more cost effective as the fund manager need not invest in property management infrastructure in multiple locations. Utilizing a third-party property manager enhances transparency, as it allows for a true separation of fund- and property-level expenses.

Investment Vehicles
Investors can participate in the farmland asset class through direct investments or through the use of a specialist farmland investment manager, that may offer funds, co-investments, or separately managed accounts. For most investors, developing a well-diversified portfolio of direct investments is prohibitively complex and time-consuming. Investing in farmland through a farmland investment manager can provide the benefits of diversification, experience, and scale. Closed-end funds have a fixed term with some potential for extension, but are generally illiquid for the term. As with private equity, fund terms can vary widely. Open-ended funds and publicly-traded REITs provide more liquidity, but valuation at entry and exit can be an issue in open-ended funds, and the performance of public REITs can be influenced by capital market trends and other factors apart from the underlying farmland investment. Co- investments and managed accounts often require a larger minimum investment, but offer investors a greater measure of control.

Sources of Return
Returns typically consist of current income from annual lease payments or from annual crop or livestock sales, plus land and related asset appreciation. Appreciation reflects the income-producing capability of the investment based on anticipated future crop/livestock prices and yields. While soil quality and climate/water availability are relatively fixed determinants of a property’s potential yield, technological and management improvements can be brought to bear on individual properties to enhance yields and returns to investors. Capital improvements such as irrigation, laser leveling, and drainage can increase current income as well as future value, as improvements that permanently increase productivity are eventually capitalized into land values.

The timing of cash flow distributions from farmland investments is dependent on both the investment vehicle and the actual investments in the portfolio and how they are managed (leased vs. direct operation). Cash flow available to distribute will depend on the relative proportion of developmental (pre-productive) properties and cash-flowing properties in the portfolio. Lease payments are typically received before the farmer enters the field, while revenue from direct operations is received as crops are sold over time. A leased U.S. row crop property may produce a relatively consistent annual income return of 3-5%, depending on its quality and location, while some directly- operated permanent crop properties can produce double-digit annual income returns, but with significant variability due to annual fluctuations in price and yield. Closed-end funds typically distribute cash flow net of working capital reserves and cannot reinvest income in additional properties, while evergreen funds and separate accounts may choose to reinvest a portion of income and realized gains. A REIT must distribute at least 90% of its taxable ordinary income to shareholders annually in the form of dividends.

How Farmland Fits in an Institutional Portfolio
Farmland has historically generated attractive returns, with excellent capital preservation and portfolio diversification at a low to moderate level of volatility. Some institutional investors allocate to farmland in the context of a diversified real asset portfolio that may include investments in real estate, infrastructure, forestry, and farmland. Others may include farmland in private equity or other illiquid asset categories. The exhibit below shows the 20-year realized correlation of U.S. farmland to other asset classes. While exhibiting low correlation to financial assets like stocks and bonds, farmland investments can provide a bond-like current income stream from lease payments or more variable income from direct operations, along with the potential for capital appreciation. In addition, through thoughtful portfolio construction, the risk/return profile of a farmland allocation can be varied to meet different risk/return preferences.²

Portfolio Diversification
Farmland portfolios can be structured as a balanced mix of row crops, permanent crops, and livestock or can be focused on a particular strategy/sector or other variations across the spectrum from fully-diversified to targeted investments. Portfolios may include ongoing farming operations or developmental “greenfield” or timber conversion strategy investments. As described above, leased row crops offer the lowest risk/return profile because the farmer takes on the price and yield risk, paying the investor a modest bond-like rate of return before beginning to farm each year. Participating or crop share leases allow both the farmer and investor to participate in some portion of annual upside/ downside. Directly operated permanent crops and livestock can provide higher returns, but the investor is exposed to both price and yield risk, thus increasing return volatility and potential for operating loss. Mixing low-risk leased investments with higher-risk directly operated strategies (including developmental/conversion properties) can provide current cash flow along with upside potential. Focused portfolios invested in a single sector such as leased row crops or livestock may fit a specific investor objective such as a desire for stable but modest returns (leased row crops), or an interest in higher income and appreciation potential (livestock and permanent crops), but more diversified strategies can help mitigate non-systematic risk.

Geographic diversification is also related to strategy choice. For example, globally competitive dairy and beef production might dictate investment in New Zealand and Australia, while leased row cropland is the norm in the U.S., but not necessarily in other geographies. In some regions, mixed-use properties that may include crops, livestock, and timber offer value-oriented opportunities relative to pure single strategy investments. Investing in emerging countries can provide greater upside potential, but at higher risk levels than developed country investments. Portfolios can be tailored to desired levels of diversification, but relative value and opportunity across sectors and geographies should be considered as well.

Investment Performance
Historical returns to direct farmland investments have been relatively high over the past two decades and particularly over the past decade as farmland investing has gradually gained popularity among institutional investors. Initially a long-term investment utilized by a small number of insurance companies and large pension plan investors, farmland investing has become more mainstream due to a convergence of factors: favorable supply/demand fundamentals, globally low investment yields in traditional “safe” assets like bonds, and increasing investor interest in diversifying real assets capable of providing an inflation hedge.
The National Council of Real Estate Fiduciaries (NCREIF) reports nominal annualized time-weighted total returns of 12.5% for its Farmland Index over the past 20 years and 17.5% over the past 10 years. On average, over the 20-year period, income has provided at least 50% of Farmland Index returns. Over both time periods, farmland, as represented by the Farmland Index, has generated higher returns than equity indices, with less volatility. It should be noted that this reduced volatility reflects in part the fact that farmland investments are not daily valued, but are typically appraised annually.³ The Farmland Index reflects the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes only, and held in a fiduciary environment for the benefit of tax-exempt institutional investors, primarily pension funds. It includes property-level returns to U.S. farm properties only and is net of property management fees, but gross of fund-level fees. Given its tax-exempt, property-level focus, only the effect of property taxes is included in the Farmland Index. Despite its shortcomings as a benchmark for global agricultural investments funds, the NCREIF Farmland Index does provide evidence of trends in investment-quality farmland performance and is currently the only available index of its kind.

Supply-Demand Fundamentals
Given the strong performance of farmland in recent years, the question as to why today is a good time to invest is a reasonable one. The answer depends on global macroeconomic forces, but also on the specific global strategies employed and locations targeted for investing in farmland today....

...MUCH MORE (9 page PDF)
HT: Abnormal Returns

Grantham, Mayo, Van Otterloo: "A Farmland Investment Primer"

This is a repost from July 2014, sort of our version of the Venice Biennale but without the art.
Or the glitz.
Or the glamor.

From Grantham Mayo Van Otterloo:

July, 2014 White Paper
Julie Koeninger
Farmland is a real asset that combines solid investment fundamentals with the potential for attractive cash yields, inflation hedging, and consistent returns from biological growth. Furthermore, farmland total returns tend to be uncorrelated with financial asset returns, offering genuine portfolio diversification for institutional investors. While institutional ownership within the asset class has grown steadily over the past few years, it still accounts for less than 1%¹ of total global agricultural land ownership, presenting significant opportunity for sustainable yield enhancement through targeted farmland investment in certain regions.

The pages that follow present an overview of the key characteristics and potential risks of farmland investing, consider the routes for implementation, and make the case for a diversified, cross-regional approach to the asset class.

Farmland Investments Defined
Farmland investments consist of direct investments in rural land along with crop and livestock assets that produce food, fiber, and energy. Farmland investments focus on the productive capacity of the land base, and returns are based on the biological growth of crops and livestock, as well as appreciation of land and related assets. By their nature, farmland investments are long-term illiquid investments in real assets.
Investments are grouped into three general categories:

1.Row crop investments include annual crops such as corn, soybeans, cotton, wheat, and rice.
2.Permanent crop investments include perennial crops such as fruit and nut crops, which have both pre-productive and mature periods. Pre-productive or “greenfield” investments where trees or vines are planted on bare ground have a “J-curve” return profile. Some mature permanent crops, like almonds, peak in productivity and then decline, so orchard age is an important factor in estimating productivity and value.
3.Livestock investments include land leased to local operators for grazing or direct livestock ownership and operation.

Institutional farmland investing typically focuses on globally competitive agricultural sectors including:
■Corn, soy, wheat, rice, and other bulk commodity row crops that can be produced most efficiently at scale.
■Relatively storable permanent crops such as nut crops or wine grapes.
■Large-scale livestock production, including dairy and beef cattle operations.
Efficient global producers, such as U.S. corn, soybean, and nut crop, New Zealand dairy, and Australian beef producers, benefit from participation in export markets, and receive a globally determined price for their output.

Management Style: Leasing vs. Direct Operation
In many regions of the U.S. and some other parts of the developed world, row crop properties can be leased to high- quality local farm operators at fixed or variable rents that provide attractive yields to the investor. These farmers leverage the scale and productivity of their operations by owning some land, but also leasing land from investors in order to maximize their return on investment. In other geographies lacking a robust farmland rental market, particularly in developing regions, a lack of leasing demand from qualified farmers makes direct operation the best approach to maximize returns. In direct operation, the farmland investment manager employs a farm manager to operate the farm. While direct operation involves a higher risk/return profile because the investor assumes both price and yield risk, it is often the preferred management style for permanent crops and livestock as it ensures that the long-term asset is well-managed and value is maintained.

Property Management
Like most real estate investments, farmland investment requires specialized property-level management. While more intensive property management is required for direct operations, property managers also provide critical oversight of tenants operating leased farms. Property management may be vertically integrated with investment management or outsourced to third-party providers. Outsourcing allows the investment manager to hire the property manager best suited to manage each type of investment in each region and can be more cost effective as the fund manager need not invest in property management infrastructure in multiple locations. Utilizing a third-party property manager enhances transparency, as it allows for a true separation of fund- and property-level expenses.

Investment Vehicles
Investors can participate in the farmland asset class through direct investments or through the use of a specialist farmland investment manager, that may offer funds, co-investments, or separately managed accounts. For most investors, developing a well-diversified portfolio of direct investments is prohibitively complex and time-consuming. Investing in farmland through a farmland investment manager can provide the benefits of diversification, experience, and scale. Closed-end funds have a fixed term with some potential for extension, but are generally illiquid for the term. As with private equity, fund terms can vary widely. Open-ended funds and publicly-traded REITs provide more liquidity, but valuation at entry and exit can be an issue in open-ended funds, and the performance of public REITs can be influenced by capital market trends and other factors apart from the underlying farmland investment. Co- investments and managed accounts often require a larger minimum investment, but offer investors a greater measure of control.

Sources of Return
Returns typically consist of current income from annual lease payments or from annual crop or livestock sales, plus land and related asset appreciation. Appreciation reflects the income-producing capability of the investment based on anticipated future crop/livestock prices and yields. While soil quality and climate/water availability are relatively fixed determinants of a property’s potential yield, technological and management improvements can be brought to bear on individual properties to enhance yields and returns to investors. Capital improvements such as irrigation, laser leveling, and drainage can increase current income as well as future value, as improvements that permanently increase productivity are eventually capitalized into land values.

The timing of cash flow distributions from farmland investments is dependent on both the investment vehicle and the actual investments in the portfolio and how they are managed (leased vs. direct operation). Cash flow available to distribute will depend on the relative proportion of developmental (pre-productive) properties and cash-flowing properties in the portfolio. Lease payments are typically received before the farmer enters the field, while revenue from direct operations is received as crops are sold over time. A leased U.S. row crop property may produce a relatively consistent annual income return of 3-5%, depending on its quality and location, while some directly- operated permanent crop properties can produce double-digit annual income returns, but with significant variability due to annual fluctuations in price and yield. Closed-end funds typically distribute cash flow net of working capital reserves and cannot reinvest income in additional properties, while evergreen funds and separate accounts may choose to reinvest a portion of income and realized gains. A REIT must distribute at least 90% of its taxable ordinary income to shareholders annually in the form of dividends.

How Farmland Fits in an Institutional Portfolio
Farmland has historically generated attractive returns, with excellent capital preservation and portfolio diversification at a low to moderate level of volatility. Some institutional investors allocate to farmland in the context of a diversified real asset portfolio that may include investments in real estate, infrastructure, forestry, and farmland. Others may include farmland in private equity or other illiquid asset categories. The exhibit below shows the 20-year realized correlation of U.S. farmland to other asset classes. While exhibiting low correlation to financial assets like stocks and bonds, farmland investments can provide a bond-like current income stream from lease payments or more variable income from direct operations, along with the potential for capital appreciation. In addition, through thoughtful portfolio construction, the risk/return profile of a farmland allocation can be varied to meet different risk/return preferences.²

Portfolio Diversification
Farmland portfolios can be structured as a balanced mix of row crops, permanent crops, and livestock or can be focused on a particular strategy/sector or other variations across the spectrum from fully-diversified to targeted investments. Portfolios may include ongoing farming operations or developmental “greenfield” or timber conversion strategy investments. As described above, leased row crops offer the lowest risk/return profile because the farmer takes on the price and yield risk, paying the investor a modest bond-like rate of return before beginning to farm each year. Participating or crop share leases allow both the farmer and investor to participate in some portion of annual upside/ downside. Directly operated permanent crops and livestock can provide higher returns, but the investor is exposed to both price and yield risk, thus increasing return volatility and potential for operating loss. Mixing low-risk leased investments with higher-risk directly operated strategies (including developmental/conversion properties) can provide current cash flow along with upside potential. Focused portfolios invested in a single sector such as leased row crops or livestock may fit a specific investor objective such as a desire for stable but modest returns (leased row crops), or an interest in higher income and appreciation potential (livestock and permanent crops), but more diversified strategies can help mitigate non-systematic risk.

Geographic diversification is also related to strategy choice. For example, globally competitive dairy and beef production might dictate investment in New Zealand and Australia, while leased row cropland is the norm in the U.S., but not necessarily in other geographies. In some regions, mixed-use properties that may include crops, livestock, and timber offer value-oriented opportunities relative to pure single strategy investments. Investing in emerging countries can provide greater upside potential, but at higher risk levels than developed country investments. Portfolios can be tailored to desired levels of diversification, but relative value and opportunity across sectors and geographies should be considered as well.

Investment Performance
Historical returns to direct farmland investments have been relatively high over the past two decades and particularly over the past decade as farmland investing has gradually gained popularity among institutional investors. Initially a long-term investment utilized by a small number of insurance companies and large pension plan investors, farmland investing has become more mainstream due to a convergence of factors: favorable supply/demand fundamentals, globally low investment yields in traditional “safe” assets like bonds, and increasing investor interest in diversifying real assets capable of providing an inflation hedge.

The National Council of Real Estate Fiduciaries (NCREIF) reports nominal annualized time-weighted total returns of 12.5% for its Farmland Index over the past 20 years and 17.5% over the past 10 years. On average, over the 20-year period, income has provided at least 50% of Farmland Index returns. Over both time periods, farmland, as represented by the Farmland Index, has generated higher returns than equity indices, with less volatility. It should be noted that this reduced volatility reflects in part the fact that farmland investments are not daily valued, but are typically appraised annually.³ The Farmland Index reflects the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes only, and held in a fiduciary environment for the benefit of tax-exempt institutional investors, primarily pension funds. It includes property-level returns to U.S. farm properties only and is net of property management fees, but gross of fund-level fees. Given its tax-exempt, property-level focus, only the effect of property taxes is included in the Farmland Index. Despite its shortcomings as a benchmark for global agricultural investments funds, the NCREIF Farmland Index does provide evidence of trends in investment-quality farmland performance and is currently the only available index of its kind.

Supply-Demand Fundamentals
Given the strong performance of farmland in recent years, the question as to why today is a good time to invest is a reasonable one. The answer depends on global macroeconomic forces, but also on the specific global strategies employed and locations targeted for investing in farmland today....

...MUCH MORE (9 page PDF)

HT: Abnormal Returns

Farmland REITs: "Farmland Partners eyes more deals - even after American Farmland purchase" (FPI)

From a July 2014 post:

...Gladstone Land is the other publicly traded vehicle. There a a few private partnerships that let in outsiders.
In February 2011 I noted:

...We've been following this trend for the last three years and have been asked when will it top?

One sign will be when Optima Fund Management brings their American Farmland Company public, still a few years away....

Optima have not yet made the move, and have been correct to keep the cash flow and cap gains to themselves but I have a feeling we are getting close....

They did the IPO on October 19, 2015.

From Agrimoney:

Farmland Partners forecast no let up in its pace of farm acquisition, even after completing the acquisition of rival American Farmland Company to create a "coast-to-coast" business worth more than $850m.

Paul Pittman, the Farmland Partners chief executive, said that the group would "continue to be acquisitive as we have been", even as it negotiates on the $200m acquisition of American Farmland in an all-share deal.

"It's essentially business as usual," Mr Pittman said, speaking as the US enters its key autumn period for farm deals.

"We will continue to acquire and grow the portfolio of Farmland Partners during the fall. This is obviously the active farm transaction season and so we'll continue to make some acquisitions."

Indeed, the extra scale that the company will gain by buying American Farmland "further enhances Farmland Partners' capabilities to pursue… transactions", using both cash and shares, the group said.

'Truly incredible footprint'

Nonetheless, Mr Pittman added that it was "very unlikely" any deals would be worth as much as that of its latest takeover, which is expected to take at $500m the value of Farmland Partners' acquisitions over 12 months when the transaction closes early in 2017.

Farmland Partners, whose portfolio is centred on row crop land in the Midwest and Mississippi Delta, would gain a "truly incredible footprint" by buying American Farmland, whose land is largely of permanent crops such as almonds and citrus, notably in California and Florida.

"You truly do have a coast-to-coast diverse set of assets at this point in time, with many, many different crop types, 25 crop types or even, in fact, a few more across the country," Mr Pittman said.

Citrus vs cotton

Owning such a spread of assets would boost the stability of Farmland Partners' performance, in making it less vulnerable to, say, the downturns that can hurt margins across row crop and grain farms.

"Corn, soybeans and wheat and rice and cotton even, frankly trade together, so a bad time for a corn farmer is also a bad time for a bean farmer, bad time for a wheat farmer etc....MORE

Previously:
Farmland REITS Go Shopping In Florida (FPI; LAND; AFCO)
REITS: "Farmland Partners' land-buying spree tops $50m" (FPI)
"Half of U.S. Farmland Being Eyed by Private Equity"
TIAA-CREF Secures $1.4bn for Second Farmland Vehicle 
Private Equity: Farmland/Ag Fund Seeks $250 Mil., Washington, Maine Pension Funds Say Okay
Real Estate Investment Trusts Down On The Farm: Farmland Partners Looks to Buy $100 Million Worth of Land (FPI; LAND)
Private Equity: Farmland/Ag Fund Seeks $250 Mil., Washington, Maine Pension Funds Say Okay
Real Estate Investment Trusts Down On The Farm: Farmland Partners Looks to Buy $100 Million Worth of Land (FPI; LAND)

Farmland: "Pricing the Good Earth" (DE; POT;MON; CAT; MOS)

A question we've pondered a few times, see links below.
From Barron's:

U.S. farm income is solid, debt is low, and crop prices and productivity are high. Does that mean that farmland is a good investment?

In the rush for hard assets over the past few years, some investors have planted farmland in their portfolios hoping to harvest nice gains.

On paper, at least, they have. U.S. land values are rising on strong prices for agricultural products, fueled to a great extent by robust exports to emerging nations. Advocates for owning farmland include big-name investors like Marc Faber and Michael Burry. But skeptics wonder whether the boom is setting up investors for a rerun of the crash that ended a similar period almost 30 years ago.

Back in the early 1980s, the sector was plunged into crisis when overleveraged farmers went bankrupt as interest rates skyrocketed to nosebleed levels during the last of the Carter years and the start of the Reagan administration.

Could a bubble be forming again in the heartland? Even Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., urged caution recently, alarmed that land prices, now 58% above 2000 levels in inflation-adjusted terms, foretell another bust—which could put more pressure on the already battered banks whose deposits her agency insures. But excessive leverage, a big villain in the crash of the 1980s, doesn't appear to be a major threat to farmers today.

"I would say we are perfectly priced for the current environment right now. If it changes radically, we could be mispriced in a new environment," says Michael Swanson, an agricultural economist for Wells Fargo, one of the largest lenders to commercial-farming operations.

Fundamentals are supporting the farm economy, says James McCandless, a managing director of UBS AgriVest. Farm income is strong, he says, while debt is low and crop productivity is increasing. In 1990, UBS AgriVest became one of the first firms to invest in U.S. farmland for tax-exempt institutions. Its farmland investments had a gross value of $544 million at the end of the third quarter.

Harvest This!

Intrepid investors should look at the yields on cropland, even if they don't plan to move to Green Acres. Farmland values have been appreciating nicely over the medium and long term.

While pockets of farmland—in the Dakotas, Nebraska and Kansas, for example—have risen strongly lately, most of the latest gains have been modest. In August, the Agriculture Department reported that the average price of farm real estate nationwide had been $2,140 an acre, as of Jan. 1, 2010, up 1.4% from the level a year earlier—but 86.1% above the level a decade before. And the National Council of Real Estate Investment Fiduciaries Farmland Index, which measures investment property, shows a third-quarter total return of 1.03%.

Gary Schnitkey, a professor of agricultural and consumer economics at the University of Illinois, says that farmland prices in his state—one of the nation's major agricultural producers—are in line with current interest and lease rates (also known as cash rents). Capitalized value, which is defined as the cash rent divided by the interest rate on a 10-year note, now equals about 95% of land prices, he says. In 1981, capitalized value soared to a heady 267%, while from 1990 through 2010, it averaged 107%. Farmers' debt-to-equity ratio is currently 12.8%, according to the U.S. Department of Agriculture, versus 13.6% in 2008; it was as near 30% in the mid-1980s.

One factor working against the development of a bubble is that big institutions—some of which were burdened by illiquid alternative investments, such as timberland, in the recent financial crisis—have done more talking about buying farmland in recent years than they've done purchasing. "There's a low level of participation by institutions…It's mostly individuals who own it, especially in the U.S.," says Jose Minaya, head of TIAA-CREF's natural-resources group, which has $2 billion in farmland investments in the U.S., Brazil and Australia....MUCH MORE

Some of our links in last month's ""Land Becomes Cash Crop in Farm Belt":

"Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?"
Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)
"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)
Marc Faber: "'Buy farmland and gold,' advises Dr Doom"
Green Acres is the Place to Be: "The UK farmland grab"
"Wall Street Eyes Farmland"
Hedge Funds Buying Farmland
The Last Holdout: "U.S. farmland fetches top dollar despite recession"
The hedge fund manager who bought a farm

There are many more, use the search blog box, keyword farm or farmland.
You can also copy and paste the query:
http://climateerinvest.blogspot.com/search?q=farmland

The Last Holdout: "U.S. farmland fetches top dollar despite recession"

During the 1920's as the stock market went on it's Roaring 20's run, from it's bear market low of 65.34 on August 29, 1921 to it's bull market high of 381.17 on September 3, 1929, commodity prices collapsed. (following the end of World War I)

From Wikimedia Commons

Land prices followed commodity prices, falling 50% between the 1920 peak and 1940.
Here's a snip from the headline story at Reuters:

..."Farmland is completely different than other real estate, residential or commercial. That market is really tough, where the ag market is very strong," Aumann said.

The average price of an acre of U.S. farmland more than doubled from $1,030 in 1999 to $2,350 in 2008, according to the U.S. Agriculture Department. Over that period the Dow Jones Industrial Average fell over 20 percent and is down further in 2009.

High prices for top Midwest farmland like the Kilton Farm are still holding up these days, shrugging off factors like weaker crop prices or the housing price crash in metro suburban areas due to foreclosures are taken into account.

"Farmland in part is driven by commodity prices. How much retracement we see in commodities is going to end up having some impact on farm values. That's a concern," said Jerry Warner, president of American Society of Farm Managers and Rural Appraisers and chief management officer with Farmers National, a farm management firm in Omaha, Nebraska....

However, from the FDIC:

Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks?

...Farmland Booms Preceded Hardships for Farmers and Their Lenders

Two significant boom-bust cycles in farmland prices occurred in the 20th century: one in the first two decades of the century and the other in the 1970s. In the first instance, strong population growth, improvement in railroads and shipping that allowed the opening of export markets, and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes.¹ By 1920, crop prices had more than doubled in only five years, and high farmland prices followed.²

Farmland values were similarly inflated by skyrocketing farm income in the 1970s. Strong export demand—due in part to rising incomes and growing populations in importing countries, and a weak U.S. dollar—fueled rapid increases in farm incomes during this period.³ In addition, negative real interest rates caused by high inflation spurred massive borrowing for farmland purchases.

In both instances, strong export demand and growing income levels convinced farmers they were experiencing a new era in agriculture that would continue indefinitely. However, the unprecedented demand for U.S. farm commodities proved only temporary. In the 1920s, the end of World War I precipitated the decline in export demand, while in the 1970s, falling demand was due to greater global competition and a stronger dollar.⁴ In addition, more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986, further dampening farmland prices.⁵ The distress led to thousands of farm bankruptcies, hundreds of farm bank failures, and a sustained decline in farmland prices.⁶

Farmland Values Have Escalated Sharply, Reaching New Peaks

Farmland values have risen dramatically across the United States during the past several years. Between 1993 and 2003, inflation-adjusted farmland prices were quite stable, increasing by 3.0 percent per year (see Chart 1). Since 2004, however, prices have jumped by an average of 11 percent annually.⁷ At $2,350 per acre, average farmland values are more than 20 percent higher than their historic peak of $1,940 recorded in 1981....

Chart 1

d

"Savills calls time on UK farmland price boom"

As noted in the intro to July's "British land prices ease as farmer buyers step back":

Farmland is "worth" some multiple of the cash flow it can generate. What someone will pay for it is another story....

From Agrimoney:

Savills called time on the UK farmland boom which has seen values quadruple in some 15 years, citing the threat from weakened crop prices and a switch by investors to other assets. 

The property consultancy ditched a forecast made earlier this year of farmland prices in the UK, excluding Northern Ireland, increasing by 6% over the next five years.

Farmland values are now expected to decline 4.1% by 2020, represented the first sustained drop in the market since 1995-2000, when prices dropped by 10.0%.

Since then, they have quadrupled to some £8,000 an acre, in a rally fuelled by a clutch of supportive factors, including low interest rates, a dash amid the world financial crisis for so-called "safe haven" investments and, for long periods, elevated agricultural commodity prices too.

Weak crop prices 

However, Savills saw weak crop prices as a primary hurdle to further price increases.

"In the light of recent market evidence, the short- to medium-term expectations for commodity prices and therefore farm profitability, we have downgraded our forecasts for the next five years," the consultancy said.

Key global forecasting organisations, including the United Nations, the International Monetary Fund, and the US Department of Agriculture, have all taking a pessimistic outlook on commodity prices out to 2020.

Land markets in some other countries, such as the US, have already recorded modest declines, blamed on lower ag profitability....MORE

Average capital growth in UK farmland values 

1995-2000     -10.0%
2000-2005     +26.6%
2005-2010     +118.8%
2010-2015     +52.8%
2015-2020f    -4.1%
Source: Savills

We've pretty much chronicled the whole move:

Nov. 2015
U.S. Farmland Price Decline Now At Two Years and Counting
Sept. 2015
"US farmland prices 'falling at a pace of 6-7%'" (AGCO, DE)
Jan. 2015  
U.S. Farmland Has Been the Top Performing Asset Over the Last 20 Years: Goodbye to all that
Oct. 2013 
Real Estate: It's Not Just London, Big Money Lining Up to Buy British Farmland
June 4, 2012 
Factoid: Price of English Farmland Has Risen 10,745% During the Reign of Elizabeth II Regina 
June 2012  
"French Farmland Offers Better Value than UK Land"

We've been posting on British Farmland for years but, outside of the odd Chateau listing and the effects of climate on wine growing I think this is the first French farmland post.
Two things to be very, very wary of: The Common Agricultural Policy and the French tax code.

March 2012
Absolute Return Partners on Investing in Farmland

 Gerald Grosvenor might beg to differ with the answer to the question in the first sentence below.
Although his 300 acres got hit hard in the downturn it has come back strongly. 
Half the Mayfair District, most of Belgravia, and Grosvenor Square where the U.S. Embassy is one of his many lessees make a nice hedge for the 4500 acre farm. 
Throw  in the 17 acres in Silicon Valley and the 1200 acre Annacis Island off of Vancouver, B.C. and you've got a bit of diversification....

Oct. 14, 2009 
Green Acres is the Place to Be: "The UK farmland grab"
  

 

The Economist

This is Nuts: Farmland Partners Buys $110m Almond, Pistachio Property from Olam

We aren't doing anything with farmland, yet. For a publicly traded entity the equation is a bit different: if they don't deploy the capital they get those pesky "What, are you just a SPAC?" questions at the annual meeting. Here's the recent performance of this one via FinViz:

Discerning reader knows full well from whom I purloined the first part of the headline.
From Agrimoney Sept 25:

Farmland Partners, fresh from a fund raise, unveiled one of its biggest acquisitions ever, with the purchase of California nut orchards from ag trading giant Olam International.

Farmland Partners said it had agreed to pay $110m for the almond, pistachio and walnut land, under a deal which will see Singapore-based OIam International keep a 25-year farming agreement at the site.

The deal, which including a revenue share agreement with Olam on the orchards, represents one of Farmland Partners' largest ever, in financial terms.

By area, the purchase, at 5,100 acres, will take the Farmland Partners portfolio to some 159,000 acres.

Row crops vs specialty crops
The purchase comes a month after the group raised $144m from the sale of 6.0m preference shares, with the company saying at the time it would "use the net proceeds from the offering for future farmland acquisitions".

While Farmland Partners, which began with a small portfolio of Illinois land, initially focused on row crops farms, a more liquid and less expensive market, it has increasingly spread into land bearing permanent or higher value crops.

Paul Pittman, the Farmland Partners chairman and chief executive, told investors in July that "we want to maintain an approximate balance of 75%, 25% between the primary row crops and the specialty crops, meaning the vegetables and the permanent crops".

However, the ratio could reach "something like 65%, 35% maybe in the extreme case", depending on factors such as expected returns from rents and capital appreciation.

Indeed, Mr Pittman hinted at the time that row crop land had become less of a priority, saying that "even if I like the long-term appreciation opportunity of an asset we see in the core of the Midwest, it's just really hard to make the math work on a current yield basis, from a cost of capital perspective"....MORE

Previously on the REITs:
REITS: "Farmland Partners' land-buying spree tops $50m" (FPI)
US land market at weakest in at least nine years
Real Estate Investment Trusts Down On The Farm: Farmland Partners Looks to Buy $100 Million Worth of Land (FPI; LAND)
Farmland REITS Go Shopping In Florida (FPI; LAND; AFCO)
Farmland REITs: "Farmland Partners eyes more deals - even after American Farmland purchase" (FPI)

For strategy see also:
A Higher Yielding Alternative to Corn and Wheat: "Agriculture Investors Develop a Taste for Permanent Crops"
We've highlighted Singapore Investment Fund Temesek's purchase of #2 almond producer Olam and Interest Rate Observer's black walnut buy rec. Here's more, from Institutional Investor:,,,

Here Comes Another Bubble: Farmland (FAM)

FAM is the symbol for Farmer Mac.
Staying on the Ag beat we have a subject near and dear to our flinty hearts.*
From Professor Schiller via Project Syndicate:

Bubble Spotting  
Robert J. Shiller

NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?
I don’t know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles. There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s. In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s.

We have had a huge rebound from the bottom of the world’s stock markets in 2009. The S&P 500 is up 87% in real terms since March 9 of that year. But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn’t look like a bubble, but more like the end of a depression scare. The rise in equity prices has not come with a contagious “new era” story, but rather a “sigh of relief” story.

Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places. But another housing bubble is not imminent in countries where one just burst. Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.

A continuation of today’s commodity-price boom seems more likely, for it has more of a “new era” story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.

But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.

Of course, farmland is much less important than other speculative assets. For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market. And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970’s....MORE

HT: Real Time Economics 

Our favorite bubble song. Ladies and Gentlemen, the Richter Scales!


*Previously:
March 2011 
Farmland Prices are Still in Boom Phase (AGM)
Feb. 2011
Farmland Boom Provides Bright Spot for U.S. Midwest Real Estate
Feb. 2011 
Fund braves weather setbacks to snap up Australian farms
Dec. 2010 
Farmland: "Pricing the Good Earth" (DE; POT;MON; CAT; MOS)

Some of our links in last month's ""Land Becomes Cash Crop in Farm Belt":

"Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?"
Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)
"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)
Marc Faber: "'Buy farmland and gold,' advises Dr Doom"
Green Acres is the Place to Be: "The UK farmland grab"
"Wall Street Eyes Farmland"
Hedge Funds Buying Farmland
The Last Holdout: "U.S. farmland fetches top dollar despite recession"
The hedge fund manager who bought a farm

There are many more, use the search blog box, keyword farm or farmland.
You can also copy and paste the query:
http://climateerinvest.blogspot.com/search?q=farmland

"Rural Bankers: Farmland Prices Rocket to Record Highs"

 From AgWeb, November 19:

For 12 straight months, the Creighton University Rural Mainstreet Index (RMI) has remained above growth neutral, to the Creighton University Rural Mainstreet Index (RMI).

For November 2021, the RMI rose to 67.7 from October’s 66.1. The index ranges between 0 and 100 with a reading of 50 representing growth neutral and is generated by a monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and/or energy. 
 
“Solid grain prices, the Federal Reserve’s record-low interest rates, and growing exports have underpinned the Rural Mainstreet Economy,” says Ernie Goss, who chairs Creighton’s Heider College of Business and leads the RMI. “USDA data show that 2021 year-to-date agriculture exports are more than 23% above that for the same period in 2020. This has been an important factor supporting the Rural Mainstreet economy.” 

For 2021, the RMI has averaged 65.7. 

The region’s farmland price index improved to a very strong, and record high of 85.5 from October’s 81.5. October’s reading represented the 15th straight month that the index has moved above growth neutral. For 2021, the farmland price index has averaged 74.6.
Here are the state-by-state farmland price indexes:....

....MUCH MORE

Previously on farmland (we have dozens/hundreds, these are just the most recent): 

September 30

Creighton Rural Mainstreet Index Remains Above Growth Neutral: Bankers Report Record Farmland Price Index

August 31 

Farmland: Prime Iowa Land Sales Setting Record After Record

June 11

"Farmland Values Soar, But Farmer Sentiment Declines"

[outro] One thing to look at is eliminating the step-up in basis for appreciated assets upon the death of the taxpayer. There are billions and billions of dollars worth of capital gains that go totally untaxed as title to the assets moves to the heirs. This is one of the most inequitable features of the tax code, entrenching a financial aristocracy, and we are not just talking farms. You don't think the Walton clan became the richest family on the planet simply through lucky genes do you?  

June 10
"McDonald's french fries, carrots, onions: all of the foods that come from Bill Gates farmland"
May 25
"Minneapolis Fed: Land Values, Cash Rents Make Largest Quarterly Jump Since the Ethanol Boom"
May 21
Creighton University's "Rural Mainstreet Index Soars to Record High: 90% of Bankers Report Labor Shortages Restraining Growth"
For the first time since 2013, the regional farmland prices expanded for eight straight months.
May 14
Farmland: "Bullish Land Price Outlook"
As goes the farmgate commodity basis, so goes the entire rural economy edifice, banking and finance, retail provisioners, land prices, the whole thing built upon the price of wheat. And corn. And soybeans. and cotton. And marijuana....

Landwatch

April 2021 Recent Farmland Sales

And more next week. In the meantime remember our oft-stated premise:

Farmland is worth it's discounted cashflow. Period.
It may sell for more but at some point it returns to trend. It can correct either in price or in time.

And relatedly, August 25
"In fertile Ukraine, a 20-year freeze on the sale of farmland is lifted -- with uncertain consequences"

One of the reasons for the Maidan Revolution was to open the sale of Ukrainian land to foreigners—it's much too good for the Ukes to keep to themselves—but that step, required by the IMF as a condition of any further loans to replace the loans that were stolen and laundered (just what was Templeton up to with the Ukrainian sovereign debt bets?), that step needs a referendum and enabling legislation.

But this phase, also required by the IMF, is the starting point....

*****

.... FarmDoc Daily just happened to post the latest USDA estimates of farmland rents for comparable Illinois land: $227 per acre or $560/hectare so you can see the attraction.

And from the bombthrowers at The Oakland Institue (we are fans), August 6:....

If interested see also:
Okay Kids: Here's One Of The Reasons We Had That Whole Ukraine Maidan 2014 Revolution Thingy
Who Owns Ukraine's Farmland?
Will We Ever Find The Looted Billions The IMF Sent To Ukraine? Ihor Kolomoisky's Adventures In America

Ag Investing: Farmland Asset Class Evolution

From Global AgInvesting, Jan. 17:
By Jeff Conrad, Managing Principal and President, AgIS Capital LLC

Institutional investment in farmland grew significantly over the last decade. This growth started in the more developed U.S. market and spread to emerging markets around the world. During this time, the NCREIF Farmland Index, a recognized property index for U.S. farmland, expanded dramatically, increasing from $1.1 billion in 2008 to $8.1 billion in 2017.¹ This growth had been fueled by a combination of new properties being added to the index combined with increased asset values. The expansion of the U.S. market was complemented by growth in other key markets around the world, including Brazil, Australia, New Zealand, and Eastern Europe. The trends that drove and shaped the growth of the farmland asset class during this period were multi-faceted, but six, in particular, played significant roles.

The Great Recession of 2008—2009:  The global economy took a major downturn in the late 2000s, the period that has been dubbed “The Great Recession”. The downturn was broad and extreme and adversely impacted nearly every asset class in which institutional investors participate. However, farmland was one of the few bright spots during the period. Based on the NCREIF Farmland Index, U.S. farmland delivered a 15.8 percent return in 2008 and followed with a 6.3 percent return in 2009.² This was extremely attractive investment performance for this difficult and dark period for institutional investors. Based on the NCREIF Farmland Index, the sector followed the downturn with several years of solid, double-digit investment performance. The farmland sector, which historically has performed counter-cyclically to the general economy, performed well during this difficult period. Even during challenging periods, people continue to need food and fiber and this demand provided an underpinning for the farm sector during this era.

For those involved in the farmland asset class during its early days in the 1990s, when its capacity to preserve capital and provide portfolio diversification were the attributes that were most frequently emphasized, the performance of farmland during this period was further proof of the valuable and important role it could play in a broadly diversified institutional portfolio. As major banking institutions collapsed or teetered on the edge during and just after The Great Recession, the Farm Credit system remained active and continued to originate loans. In fact, major farmland portfolios were leveraged during this period at very attractive long-term rates. This strong performance during a difficult investment period helped establish the farmland asset class that we have today.

The Faltering Performance of Timberland: For the last 25 years, timberland and farmland, both biologically-based, hard asset investments, have competed for the interest and attention of institutional investors. Both asset classes offer similar attributes in that they have the potential to provide current income as well as portfolio diversification benefits and inflation hedging protection. The timberland asset class became more established in the 1990s based on exceptionally strong investment performance – a result of environmental restrictions being placed on the harvesting of public forests in the Western United States and a massive industry consolidation that led to the liquidation of timberland holdings by the world’s major forest products, paper, and packaging companies. These circumstances provided opportunities for timberland investment management organizations (TIMOS) to become established and to build significant portfolios for institutional clients based in the U.S. and elsewhere. By comparison, the farmland asset class struggled for acceptance because its performance was less compelling when assessed against the temporal case then being made for including timberland in a portfolio. Faced with having to choose between the two asset classes, each offering similar benefits, but timberland offering higher, near-term returns, investors made the easy decision, which led to the more rapid growth of the timberland investment sector.

When The Great Recession hit in 2008, the tables turned for farmland and timberland. Based on data from the NCREIF Timberland Index, after the downturn, the timberland asset class struggled to maintain and regain momentum – generating two consecutive years of negative returns. These, in turn, were followed by several additional years of weak performance relative to the asset class’ most recent trend. This period highlighted the dependence of the timberland asset class on demand for both raw land and building products. Because of weak economic growth, the U.S. housing market floundered for several years after The Great Recession. This led to a decline in land values, especially for timberland assets that were acquired at premium pricing because they were initially assessed as being in the path of residential and commercial development. It also undercut demand for the timberland asset class’ highest value product, sawtimber, which is used to produce dimensional framing lumber. The end result was a prolonged period of weak returns for timberland. TIMOs responded on behalf of their investment clients by allowing their trees to continue growing on the stump – foregoing near-term income in the hope of capturing higher margins from the sale of larger and more valuable sawtimber products in the future. However, this strategy, which was widely adopted because few other options existed for capturing value, only exacerbated the problems TIMOs and their clients faced in the long run because it led to a more sluggish recovery for the timberland asset class. The large supply overhang of sawtimber kept prices suppressed even as the housing market began to show signs of sustained recovery three years ago. Meanwhile, today, the building products sector continues to work through the excess inventory of sawtimber....MORE

"Who really owns American farmland?"

From New Food Economy, July 31:

The answer, increasingly, is not American farmers. 

We’re used to thinking of escalating rents as an urban problem, something suffered mostly by the citizens of booming cities. So when city people look out over a farm—whether they see corn stalks, or long rows of fruit bushes, or cattle herds roving across wild grasses—the price of real estate is probably the last thing that’s going to come to mind. But the soil under farmers’ feet has become much more valuable in the past decade. While urban commercial real estate has skyrocketed in places like New York, San Francisco, and Washington, D.C., powerful investors have also sought to turn a profit by investing in the most valuable rural real estate: farmland. It’s a trend that’s driving up costs up for the people who grow our food, and—slowly—it’s started to change the economics of American agriculture.

Think of it this way: If you wanted to buy Iowa farmland in 1970, the average going price was $419 per acre, according to the Iowa State University Farmland Value Survey. By 2016, the price per acre was $7,183—a drop from the 2013 peak of $8,716, but still a colossal increase of 1,600 percent. For comparison, in the same period, the Dow Jones Industrial Average rose less than half as fast, from $2,633 to $21,476. Farmland, the Economist announced in 2014, had outperformed most asset classes for the previous 20 years, delivering average U.S. returns of 12 percent a year with low volatility.

That boom has resulted in more people and companies bidding on American farmland. And not just farmers. Financial investors, too. Institutional investors have long balanced their portfolios by putting part of their money in natural resources—goldmines and coal fields and forests. But farmland, which was largely held by small property owners and difficult for the financial industry to access, was largely off the table. That changed around 2007. In the wake of the stock market collapse, institutional investors were eager to find new places to park money that might prove more robust than the complex financial instruments that collapsed when the housing bubble burst. What they found was a market ready for change. The owners of farms were aging, and many were looking for a way to get cash out of the enterprises they’d built.

And so the real estate investment trusts, pension funds, and investment banks made their move. Today, the United States Department of Agriculture (USDA) estimates that at least 30 percent of American farmland is owned by non-operators who lease it out to farmers. And with a median age for the American farmer of about 55, it is anticipated that in the next five years, some 92,000,000 acres will change hands, with much of it passing to investors rather than traditional farmers.

But what about the people—often tenant farmers—who actually work the land being acquired? During the same period that farmland prices started gaining steam, many crop prices have stagnated or fallen. After hitting highs above $8 a bushel in 2012, corn prices today have fallen back to less than $4 a bushel—about what they were ten years ago, in 2007, when farmland prices first started to soar.

It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst?

Three big factors have contributed to the rapid increase in the prices paid for farmland—which is usually defined to include grazing land and forests—according to Wendong Zhang, an assistant professor of economics at Iowa State University. (Zhang tracks farmland prices, especially Iowa farmland prices, which are among the best documented in the country.)

First, interest rates, since the financial crash of 2007–2008, have been at historic lows, which tends to drive asset prices up. There has been “phenomenal growth” in the ethanol market, Zhang says, linked to increasing interest in sustainable fuels. Indeed, if you graph ethanol production over the past 20 years, it shows exactly the same explosive growth as land prices. And as exports to China and elsewhere have increased, farm income has risen. “Farm income is the variable to track” in analyzing land prices, Zhang explains.

But there’s an additional factor: well-heeled investors are snapping up farmland, driving prices up. Here’s how the Economist explained it:  “Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”....

...MUCH MORE 

Weighing the Odds of a Crash in Farmland Prices

Hey what's the worst that could happen?
Any land bought with a mortgage over the last few years would be underwater and at risk of not being able to service the debt. Default, foreclosure.
But someone will own the land. Maybe BlackRock swoops into farm country, buys up acreage and offers to let the former owners become sharecroppers. Problem solved, right?
From Bloomberg:

Corn Plummeting Spurs Talk of ’80s U.S. Farmland Bust: Mortgages 

Din Tai Fung, a restaurant in Shanghai’s Xintiandi district, is famous for its steamed pork dumplings. The pigs that keep those dumplings on the table are fattened with corn -- much of it imported from the U.S.

American farmers have prospered during a three-year boom in corn and cropland prices. As values have soared since 2011, farmers bought more acres and upgraded their harvesters to produce a record corn crop of almost 14 billion bushels in 2013.

Nothing better shows the fertile times than investment in farm equipment. Sales of self-propelled combines, including an $850,000 John Deere (DE) model with iPod system, navigational equipment and heated seats and an attachment that harvests the corn, jumped 40 percent in November.

Now, as corn prices start to decline, bankers and agricultural economists are predicting a slowdown in farmland prices that could turn into a bust.

“I can see the fear in farmers’ eyes when they think of all the moving pieces around the world gutting the value of next year’s crop,” said David Kohl, an agricultural economist and president of consulting firm AgriVisions, who last week spoke at several farming conferences in northern Nebraska. “Most of them know the boom in corn prices and farmland prices is coming to a screeching halt.”

U.S. farmers, whose earnings grew an average 6 percent in 2013, face several challenges: a likely reduction in corn exports to China after a record year; greater competition from other nations; moves in the U.S. and the European Union to limit the use of ethanol, a biofuel made from corn; and a possible record in production of the crop in 2014.

1980s Crash
Kohl said a plunge in land prices would strip value from farms and put over-leveraged farmers out of business. Farmland prices are up 72 percent to about $8,000 an acre in the last three years, according to data from the U.S. Department of Agriculture. In Iowa, the largest producer of corn, the gain was 90 percent, according to the Iowa State University in Ames.

The value of the nation’s $2.5 trillion of farmland may tumble by as much as 30 percent in the next three years as the corn rush ends, according to Gary Ash, chief executive officer for 1st Farm Credit Services in Normal, Illinois.

“The increase in land prices was caused by the increase in corn prices,” Ash said. “The reverse is going to be true. The drop in corn is going to result in a drop in land value.”
In the 1980s -- the last time an agricultural land-price bubble burst -- thousands of families lost their properties. Farmers who bought additional land when prices were surging were caught with too much debt as commodity prices fell.

Lender’s Nightmares
Farmland prices tumbled 27 percent in the four years following a 1982 peak, according to USDA data. In some areas of the Midwest’s grain belt, losses were more than 50 percent...MUCH MORE

We've been doing our Cassandra bit for a couple years:
Nov. 20
The End of the Farmland Price Boom

Following up on last Friday's "Chicago Fed 3rd Quarter 2013 Farmland Price Report".
Farmland is worth the cashflow it can generate. At $4.25 corn it is tough to cover input costs much less any carrying costs.

July 19 
US Farmland: Price Growth Slows, as Farm Profits Fall (corn now under $5.00)
June 20
"INSIGHT-Big U.S. harvest may hit grain prices, test high farmland values"
May 30
St. Louis Fed Posts Q1 Farmland Price Decline

I think we're closer to the end of the boom than the beginning. The key now is farm income.
We'll be back with more tomorrow....

And even as far back as December 2011, coming into the 2012 marketing year:
What Would Sub-$4.00 Corn Do to the Price of Farmland?

My back-of-the-envelope calculation says that every arms-length purchase since 2008 would be underwater.
Farmland is worth it's discounted cashflow. Period.
It may sell for more but at some point it returns to trend. It can correct either in price or in time.
Corn is trading at $5.94, down considerably from it's $7.99 record high earlier this year....

Actually there are many more, use the search blog box if interested.