Think long-term with wild land prices

Think long-term with wild land prices

By: Jeff Caldwell 04/23/2012 @ 1:41pm

Some Corn Belt values have seen their sharpest price jumps ever. Crop prices have been good. Interest rates have been low. Farm incomes have been healthy. Makes for a healthy outlook for farm land values, right?

There is bad news, though. Interest rates can't get much lower. There's a lot of uncertainty about this year's crop yield potential. And, both fixed and variable costs to raise corn and soybeans continue rising.

Add it all up and it's certainly not the end of the bull run for farm land prices, but it's reason for more caution in pricing new land than in recent years, says director of the Purdue University Center for Commercial Agriculture and ag economist Brent Gloy. Ultimately, it's best to take a longer-term view of both land values and your ability to keep up with them instead of remain beholden to a shorter-term perspective.

"In the short term, people will buy [land] because they think it's going to go up, and that's where we get concerned," Gloy told Agriculture.com. "I think there are a lot of people who may be optimistic about earnings in the future but are still tying the value of what they're paying for the land for the earnings they can get off of it."

Right now, grain exports, already-tight grain stocks and interest rates are all looming large for the land market. And, all these largely bullish variables -- especially grain exports right now -- could turn on a dime at any time, making it difficult to track them effectively on a short-term basis, he says.

"The scary thing about farmland and agriculture in general right now is when you start talking about exports being so important. They tend to grow over time, then change dramatically. Those can really shock things," Gloy says. "Those are the hard things to forecast."

The grain market saw a perfect example of this scenario play out over the weekend when officials in Brazil took action to close its ports to soybean exports in an effort to keep up with orders amidst a new-crop supply shortage. After a lower start to the trade Monday, the grains moved higher on the prospect of more sales of U.S. soybeans on the export market.

"For 20 years, we've been saying China's going to import all these ag products, and all of a sudden, they really get an appetite for our commodities," Gloy adds. "We knew that they'd likely buy more, but when and how much is tough to estimate."

Instances like these are bullish. But, there's also a lot of bearish potential out there too, Gloy says, namely the movement of already-low interest rates higher. Then, there are variables that could go either way.

"Everything's so tight right now that it's going to depend a lot on what the weather does, in large part, and what kind of yield we get."

The consequences of looking at any of these variables in a short-term context is dangerous when you're taking them into account when buying land, Gloy says.

"The earnings you get next year are a small portion of the earnings you're betting on for a farmland purchase," he says. "It's going to take years of earnings to get your cash back. We tend to get a little overfocused on the short term. We need to get back to the longer-term perspective."

Right now, Gloy says there are basically 3 camps among farmers on this issue:

  1. The camp that says "this is crazy and these high prices aren't going to last...it's not going to end well," Gloy says.
  2. There's also the camp that feels the rally is here to stay and believes "we haven't seen anything yet" in terms of high land values, he adds.
  3. Then, there's a group more toward the middle. "Their attitude is that they want to buy a farm but don't want to get overextended. They'll say 'If there's something available, I'm going to buy it, but I'm not going to go crazy. I'm trying to keep an open mind about it,'" Gloy says.

The biggest concern with the land market moving forward, he says, is in the buyer's mindset. Right now, there are a lot of farmers and investors buying land under the assumption that land's value will only grow. But, as prices continue to move higher, that's going to change.

"We get the sense that the market's still tied to earnings forecasts. It doesn't appear at least that it's gone into a deal where they're buying it just because it's going to go up," Gloy says. "That's the biggest risk: When people forget to go back and tie it to what their earnings are. That's going to determine the value you get out of it and what somebody's going to be able to pay you. In the short term, people will buy it because they think it's going to go up, and that's where we get concerned.

But, there are a lot of people who have a pretty grounded mindset and may be optimistic about earnings in the future, but are still tying that value of what they're paying for the land for the earnings they can get."