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Monday, 09 April 2012 09:19

Farmland prices rise as fears of bubble abate

Written by  Rod Kackley
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WEST MICHIGAN — Farmland could very well have strong investment potential if the upward trends seen in land prices continue.

No lesser authority than the Federal Reserve Bank of Chicago, in its February 2012 Ag Letter newsletter, stated that “the year 2011 may go down in the annals of U.S. agriculture as a once-in-a-generation phenomenon.”

Farmland values for the year shot up 22 percent in the Seventh Federal Reserve District, which includes Michigan, Illinois, Indiana and Wisconsin. That is the biggest annual increase since 1976. On top of that, 40 percent of those surveyed expect continued farmland value gains to be recorded during the first quarter of 2012.

The year 2011 may also go down in history as agriculture’s best-case scenario. Coupled with rising farm land prices and falling interest rates, farmers saw prices for their crops skyrocket.

Eric WittenburgAlthough farmland price information for Michigan in the fourth quarter of 2011 was not sufficient for the Federal Reserve Bank of Chicago to release a percent change in dollar value of “good” farmland for our state, Michigan State University Economist Eric Wittenburg told MiBiz he has no doubt that West Michigan farm land prices are coming close to what the rest of the Seventh District is seeing.

He said farmland prices in Kent, Ottawa, Muskegon and Allegan counties are hitting close to $4,200 an acre for tiled land to $3,800 an acre for non-tiled land. However, Wittenburg also pointed out those numbers are about a year behind, so the actual prices are probably going to be above that. On the negative side, the value of fruit trees has been stable or has gone down a bit, falling from $8,600 to $8,300 per acre for fruit trees.

Gene Szpeinski, broker for Signature Associates in Grand Rapids, told MiBiz he is seeing $2,800 to $4,500 an acre farmland prices, depending on location, potential productivity and the proximity of utilities.

As strong as those numbers may be, Michigan’s farmland values are running a little bit behind the rest of the Seventh Federal Reserve District.

“We are a hair below the other states, but those other state’s (farmland) prices are incredible,” Wittenburg said. “You have to wonder, ‘What planet are these guys on?’”

Gene SzpeinskiThe run up in farmland prices has many wondering what’s driving up the prices and whether or not there could be a bubble on the horizon.

Szpeinski had an unexpected answer for the first question. He doesn’t see prices being pushed up by good farming as much as by bad real estate investments. The Grand Rapids-based broker is selling a lot of land back to farmers after it had been purchased for residential developments that became victims of the housing bubble and failed.

“There has been an abundant supply of foreclosed land, and that gave farmers a new avenue to pursue,” Szpeinski said. “But that is slowly going away. The ‘huge supply’ has dwindled to only ‘significant.’”

Wittenburg believes farmland prices will continue going up because farmland is seen as such a good investment when you grade it on the curve against everything else.

“People are looking for a safe place to put their money,” he said. “One of the benefits of land is that you can actually walk on it and see it.”

In other words, real estate is “real.” That is what the country thought when housing prices went through the roof before crashing down, taking the rest of the U.S. economy with them. Those who remember the 1980s-era farmland price bubble that bankrupted farmers in the Great Lakes and Great Plains states have to question whether the current situation is a new farmland price bubble.

Wittenburg said he does not think that should be a concern because farmers and their bankers have learned some tough lessons.

“When land prices crashed in the 1980s, the farm credit system was loaning money on ‘pie in the sky’ (ideas), with no money down,” he said. “Now they want 20 to 25 percent down, at least. “

Szpeinski said he doesn’t worry about a farmland price bubble but “you have to keep in mind that in farming, you are only as good as your last season. Every year is a new adventure for these guys.”

However, he is optimistic that farmland prices will continue to escalate, as long as crop prices continue to rise. “Good prices for crops means good prices for land,” said Szpeinski.

Even though lenders want 20 percent to 25 percent down on a land purchase, interest rates are as low as land prices are high. Wittenburg said the average rate is close to 6-percent.

“Barring some terrible event, we are looking very good,” he said. “Farmers made some money and those who were good managers paid down some debt.”

Wittenburg also believes farmland prices will continue to go up because so many farmers have equity. When they have equity, their debt-to-asset ratio is low, so they can buy land and expand.

“As long as there is a strong income stream that farmers can cash flow, they will buy and push land prices up,” said Wittenburg. “Farmers don’t want to own all the ground, just the ground next to theirs.”

Read 2732 times Last modified on Saturday, 11 August 2012 10:08

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