With the heat leaking out of ag real estate markets north and south of the border, you can almost see landowners starting to ease back in their armchairs, settling in for a good, long wait.
As an investment strategy, in fact, that might be a wise choice.
All eyes are on the market, wondering if prices are about to sag, but for Mike Boehlje of Purdue University, there’s no “if” about it.
With expectations of a rising interest rate meeting bearish commodity prices, American land values are softening. “We have been saying for the last year or more that we would expect them to decline over the next two to three years by 15 to 20 per cent,” Boehlje says. “It looks like that process is already underway.”
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Canadian prices may be supported by the weak loonie, says Bob Thompson, an appraiser near Calgary who works in nearly all of Canada’s central and western provinces, but he’s concerned about the effect of lower commodity prices on future land values. And he doesn’t believe he’s alone.
A flat market has emerged in his area, though farm sales may not really show that until April since most deals go down in February and March.
In the U.S., there are myriad regional factors that make it difficult to point to clear trends. eastern Corn Belt (Indiana and Ohio) land values, for instance, tend not to ratchet up or down as much as western Corn Belt (Nebraska, Iowa and Illinois) values.
Still, recent survey results also suggest to Boehlje that this may only be the beginning of the decline. Yet land in the United States has been a wise investment, Boehlje adds. When part of a 20- to 50-year buy-and-hold strategy, it is a rare asset that offers both portfolio diversification and also an excellent hedge against inflation. But these economics haven’t favoured non-farm investors.
“Land, properly purchased, is a very good investment, but, like anything else, you can pay too much for it,” Boehlje says. “Land historically generates a four to six per cent earnings return, and if I pay for land and it only generates three per cent earnings return, I probably paid too much.”
Right now Indiana and Iowa farmland is only generating about a three per cent return he says, so investors just haven’t been able to stay in the game when farmers with long-term horizons start bidding prices up.
“Farmers have had the purchasing power and a willingness to bid land values away from many disciplined investors,” Boehlje says. “But they (investors) can still buy successfully in permanent crops in Florida, California, and other parts of the country.”
Not everyone shares Boehlje’s balanced outlook, however.
Based in Omaha, Farmers National Company manages properties for nearly 6,000 landowners across the country and a significant number of them have been non-farming investors. “For years while I’ve been with this company, we’ve had investors call and want to buy land,” says Jim Ferrell, company president.
That pace picked up starting in 2006, with investors taking over properties, improving them, and renting them out to local farmers. “Over a billion dollars’ worth of farmland was sold in 2012 in that class that we’re aware of,” Ferrell says.
But some people would say that’s when smart money started to get out of the market.
“I sit on the Federal Reserve Board here in the States, so I’m involved enough in interest rate discussions to know that we have fuelled an exuberance in land values that I think probably pushed land values at least 25 to 30 per cent above where they should have gone,” Ferrell says. “If you buy my theory, even if we just normalize interest rates, we’re going to pull a lot of money out of this market.”
The counterbalance, however, could prove to be the strong Chinese market and ongoing government support for the ethanol industry. “If you want to put three legs under a stool and set the ag market on top of it, it’s monetary policy, the influence of China that hit this market in 2006, and the ethanol market that hit in 2006 that created the perfect storm,” Ferrell says. As long as the Chinese market holds at six or seven per cent growth, it will support U.S. land prices. Projections for the ethanol business also look positive for the first half of 2015, and Ferrell also thinks biofuels will offer similar results.
“Land values are a symptom of what’s going on,” he says.