The Land Market on Edge
By Randy Dickhut | Sr. Vice President Real Estate Operations | Farmers National Company
One of the hottest topics circulating through agriculture the past few years has been the land market. In 2019, the topic is open for more speculation than ever as land values and the market are on edge trying to decide if prices will be pressured down or if the market will establish a bottom.
Land values have exhibited an underlying base of strength from several factors, including historically low interest rates, low supply of land for sale and adequate buying capital. The other side of the land value equation is seeing increased uncertainties that could weigh down on the land market.
The biggest concern at this time in the agricultural land market is the financial health of producers. U.S. agriculture is in its sixth year of a downturn with overall net farm income for 2019 projected to be down 50% from 2013. Working capital has declined 75% since 2012 and inflation adjusted farm debt is at the highest levels since the 1980s. Low commodity prices coupled with rising costs have squeezed profits and working capital, causing farmer buyers of land to be more cautious.
Farmers National Company is seeing a small increase in the number of farmland sales by financially stressed producers due to multiple years of reduced income. Some of these sales are sold quietly and not exposed to the marketplace to get top dollar. Other sales are coming from producers who are proactively liquidating a land asset to improve their balance sheet and cash flow.
Overall, U.S. agriculture remains in solid financial condition despite weakening on a number of fronts. Debt-to-asset ratios are worsening but remain below recent higher levels. The percentage of highly leveraged crop farm businesses with a debt-to-asset ratio of 0.41–0.70 is forecasted to be 5.1% in 2019, which remains below levels of 20 years ago (USDA ERS & NASS, Agricultural Resource Management Survey). The number of farm and ranch bankruptcies is increasing but is far below what was experienced in the 1980s. Land values that have held up better than expected have supported the growing level of financing required for some producers.
With the known problems that agriculture and the land market are facing, there are also uncertainties that will have an impact on the sale and price of ag land. Major concerns over the past few years have included low grain and milk prices. Final U.S. crop production will be the biggest concern for individual producers, end users and the world market. Trade issues continue to have short-term effects on commodity prices and production costs while the potential for ongoing negative impacts becomes possible the longer trade is disrupted. Interest rates look to be stable for the foreseeable future, but world economic performance is more uncertain.
As with other income-generating real property assets such as commercial buildings, net income is important in valuing farm and ranch land. Income that the asset generates over the years is the underlying basis in determining the asset’s value. Of course, there are other important factors that affect the value of land such as interest rates, supply of land for sale, demand to buy and the return on competing investments. All of these factors have an influence on the price of land at any given moment in time, but the basis of value is the income generated.
To think about the future of the ag economy, you have to study the past, too. One chart that we can look at is the 90-year history of real net farm income from 1929–2018 adjusted to 2017 dollars. Average U.S. net farm income during this time frame was near $84 billion. There were three main periods of above average net farm income accounting for 26% of the time. Near average incomes were experienced 28% of the time. Below average net farm income happened 46% of the time or nearly half of the 90-year period. Net farm income for the two most recent years falls around $64 billion to $69 billion, which is much below average.
An interesting aspect of the 90-year period is that after the first two main periods of above average incomes (1940s and the early 1970s), there was a period of years with average to below net farm incomes lasting 20-25 years. Since the most recent income peak in 2013, we have experienced five down years ending up in the much below territory. While net farm income was dropping nearly 50% during the past five years, land values dropped less than half that amount. As was said, other factors such as low interest rates and a good equilibrium of buyers and sellers supported land values.
Going forward, net farm income is forecast to rebound somewhat, but it is dependent on demand for grain, world crop sizes and world economic conditions. Will we be in an extended period of average or below average incomes or will things be different today because of world population growth, scarce resources in parts of the world and the growing list of uncertainties surrounding agriculture?
Agricultural land values have been surprisingly resilient over the past two years despite the continuation of depressed farm incomes. Supportive
factors combined to hold land prices in most areas, especially for good quality farmland. Concerns are building in the land market primarily surrounding the financial health of farmers and ranchers.
As 2019 wraps up, the land market will remain on edge watching farm finances, weather, crop size and trade issues. The outcome of these and other unknowns will guide which direction land values will move over the coming months.