Cropland prices in some areas are now showing declines, but grassland and cows seem to be holding their value and even gaining on dirt prices.

This appears especially true for cash pasture-rental prices.

As you would expect, the situation is widely varied.

A Nebraska report at mid-year comparing 2014 to 2015 average pasture-rental rates across different regions of the state showed year-over-year increases of 11-85 percent.

In Wyoming, the Nebraska Panhandle, central Nebraska and western South Dakota in May of this year, summer grass-lease prices were reported “generally higher.”

In May, the Chicago Federal Reserve Board reported on its survey of 234 agricultural lenders that just over half of the responding bankers expected farmland values to be stable during the second quarter of 2015, but nearly all of the rest expected farmland values to head lower. The Chicago Fed covers the states of Illinois, Indiana, Iowa, Michigan and Wisconsin.

In its second-quarter report, the Dallas Fed said bankers surveyed generally expected farmland values to be stable. The report also indicated cash rents held steady or increased slightly for ranchland, but for both dryland and irrigated cropland, cash rents declined slightly from late 2014 and early 2015.

The Kansas City Fed also said in its second-quarter report that cropland values were steady, rising less than 1 percent from the first quarter to the second quarter. It said cropland prices in the Kansas City district are 6 percent above their year-earlier level.

Commodity prices a factor

Corn prices were down 16 percent, and soybean prices were down 28 percent in March 2015 compared with a year earlier, based on USDA data. So, naturally, the states or lands with a greater dependence on corn and soybean revenues would face more downward pressures on their farmland values.

While current land values have generally trended lower this past year in comparison to the sharp increases of recent years, results of farm and ranch income at year’s end could shift land market dynamics, says Farmers National Company, a farm and ranch real estate company.
“Harvest results of 2015 will make it a pivotal year, which could impact the land market for several years,” says Randy Dickhut, AFM, vice president of real estate operations of Farmers National Company. “Farm and ranch income will drive the direction. A great deal could happen between now and November.”
Dickhut says margin compression is occurring as a result of lower grain prices and steady input costs. He believes higher grain prices this fall would stabilize land values; however, lower prices could push values downward. While farm and ranch profits are forecast to be lower in 2015, affecting annual cash flows, agriculture overall remains financially strong due to past profits. Operators working to shore up financial stress brought on by overextending cash flow may be looking for strategies to improve their finances. This could lead to a boost in sales as property owners work to right balance sheets.

Location still key
Location and quality of land continue to be the main drivers of pricing for individual tracts. The stability of this market is maintained by a lower supply of land for sale, contrasted with a continued demand for quality properties. Farmers National statistics show the volume of properties for sale is down 40 percent over the past six months, as compared to the past two years.

“The current level of available land is having a real impact on farm and ranch operations looking to expand,” Dickhut says. “Demand is still good for quality land. The market just isn’t as aggressive as in the past few years, so values are drifting sideways to lower.”
The market slowdown can, in some ways, be blamed on the absence of tax policy changes, which helped prompt sales this past year. While land values are down nearly 10 percent in many areas, price softening is happening at different rates in each region. For example, sales in the Northwest have been brisk, as the California drought is driving activity north. The Southern Delta region hasn’t seen much decline, while parts of the Midwest are experiencing significant drops in value.

Cash down, too
Cash rental rates for Chicago Fed district agricultural land were strikingly down 8 percent for 2015 compared with 2014. Demand to purchase farmland was weaker in the three- to six-month period ending with March 2015, compared with the same period ending with March 2014. Moreover, the amount of farmland for sale, the number of farms sold and the amount of acreage sold were all lower during the winter and early spring of 2015, compared with a year ago.

The drop in 2015 cash rents stemmed from lowered expectations for making a profit from farming on rented ground in 2015 (given the recent decreases in crop prices). Faced with the possibility of acres going fallow, farmland owners seemed to have agreed to reductions in cash rents, even though farmland values had not shown much weakness in most of the Fed district. Farmland values might have resisted a similarly sized downward correction because farm operations were generally profitable enough over the past decade to generate reserves of funds available to purchase farmland in a market that has now slowed. Furthermore, interest rates remained extremely low, providing lower discounts to future earnings from the ground and ultimately supporting farmland values.

Additionally, the Chicago Fed noted the livestock sector seemed to support farmland values, particularly in Wisconsin.
Investors’s role

While current buyers are predominantly active farmers and ranchers adding land to their operations, interest from investment funds and individuals is on the rise. In addition, generational land transfers continue to play a large role in market movements, as many inheriting land choose to sell.
“With the softening of land values, some investors are looking at this as an opportune time to buy,” Dickhut says. “Land is considered a low-risk long-term investment, so we will see these types of buyers jumping into the land market more and more over the next several years.”
Demand for cropland and grazing land from owner operators remains good, but buyers are being more realistic in what they will pay, given lower grain prices. Land professionals are recommending that sellers be more realistic in evaluating the quality of their land and the expected selling price in order to have a successful sale.

Dickhut believes long-term economic trends look positive in relation to land values and ag markets. He expects demand for feed grains and protein sources by China and other world markets will remain strong long-term as the growing world population has a desire to eat better.
Alumbaugh is editor of PORK Network.