Tuesday, December 17, 2013

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.