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Sunday, 16 February 2014 22:26

Will farmland values wilt as commodity prices slump?

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While farmland values are expected to increase again in 2014, the rate of that increase is expected to soften due to slumping commodity prices.

That’s according to a recent report from the Michigan State University Department of Agricultural, Food and Resource Economics that says farmland values this year in Kent, Ottawa, Allegan, Van Buren, Kalamazoo, Berrien and Cass counties are predicted to increase between 1.8 percent and 2 percent, depending on land use. That compares to growth of 4.8 percent to 7.4 percent last year.

Farmland values for West Michigan are among the highest in the state, according to the MSU report. In the region, field crop acreage ranged from $4,548 per acre for non-tiled land to $5,060 per acre for tiled land, irrigated land averaged $6,122 per acre, and fruit tree acreage averaged $8,571 per acre, the report stated.

But one industry watcher thinks those land values could come down if commodity prices continue to fall.

“The big issue now is we’ve seen the value of corn and grain drop significantly,” said Adam Kantrovich, Ph.D., a farm information and resource management specialist with the Michigan State University Extension. “In some cases, we have producers operating at below the break-even point.”

While farmers had been seeing prices of $7 to $8 a bushel for corn, they’re now experiencing prices hovering between $3.60 and $4.10 per bushel, Kantrovich said.

For growers who recently bought or leased land at peak values, their ability to turn a profit could be hampered by the drop in prices, Kantrovich said.

Recent reports show signs of stress for some growers. In one recent example, Stamp Farms in Decatur filed for Chapter 11 bankruptcy after overleveraging the business, and the operations and the land were sold at auction last year.

“Some people are saying that we could see a crash in farmland values like what happened in the 1980s,” Kantrovich said. “There are some similarities, but I don’t see the same type of crash occurring. That’s not to say we won’t see a depression in (land values) off their highs.”

A January 2014 report on farmland values from the Omaha, Neb.-based National Farm Company, a farm management firm, suggests that farmland price deflation could already be starting to occur. The report showed the average sale prices in Michigan for high quality plots dipped from $6,900 per acre in 2012 to $6,800 per acre last year. While prices declined only slightly, Michigan and Kansas were the only two states where prices didn’t increase or had no change, according to the report.

But as prices dipped, the average value of Michigan farm real estate, including all lands and buildings, grew 12.9 percent from $4,250 per acre in 2012 to $4,800 per acre last year, according to the U.S. Department of Agriculture (USDA) National Agriculture Statistics Service. Statewide, average cropland values grew 15.0 percent to $4,600 per acre, while pasture land values increased 8.0 percent to $2,700 per acre, according to the USDA.

From 2009 to 2012 and into last year, the big driver in farmland values was a spike in grain and corn prices, which produced strong profits for many growers, Kantrovich said. West Michigan farmers responding to the MSU survey cited grain prices as the factor most affecting land values.

Last March, farmers across the Midwest were receiving record prices for their land as domestic and overseas demand for ethanol spiked, The New York Times reported.

But commodities prices weren’t the only factor pushing up farmland values last year, Kantrovich said. Low interest rates, an uptick in the number of investors wanting to invest in farms, expansions by dairy and other farm operations as well as a small amount of competition with commercial development all have an indirect influence on farmland, he said.

Given the growing farmland values, more farmers across Michigan also turned their attention to mapping out an exit strategy, Kantrovich said.

As some farmers started to cash in on higher land prices and others begin succession planning for their business, that’s created a market opportunity for land management and real estate investment companies and expanding farm operations to scoop up the land that does become available, Kantrovich said.

In West Michigan, growth in the small berry industry is driving land transactions as of late.

Gladstone Land Corp. (NASDAQ: LAND), a Virginia-based publicly traded REIT, continued to buy up land with a particular interest in berry farms last year. On Nov. 6, the company acquired three farms totaling 149 acres in Van Buren County for approximately $2.0 million. In connection with the acquisition, the company signed a five-year lease with True Blue Farms Inc., one of the leading vertically-integrated blueberry producers in Michigan. The deal included a five-year option to extend the lease, according to a statement. 

Last April, Gladstone also purchased a 119-acre blueberry farm in Covert, Mich., as MiBiz previously reported.

“We’re tuning up and beginning to buy as much farmland as we can right now,” CEO David Gladstone said at the time. “There are lot of farmers out there just leasing their farms (who) have children with no orientation for the business. They’re getting older and looking for some liquidity.”

Despite the recent activity, Kantrovich’s outlook on farmland values remains cloudy.

“I have a hard time seeing a continued increase across the board,” he said. “I don’t have a good answer, but if grain prices don’t increase, there is definitely potential for a softening in rental rates and land values.”

Read 6740 times Last modified on Sunday, 16 February 2014 18:26

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