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Sunday, 13 September 2015 20:30

Agricultural real estate still strong, despite wide variables

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Out-of-state REITs have targeted West Michigan’s blueberry farms in recent years, including two deals for $3.7 million this year involving Denver-based Farmland Partners Inc. Out-of-state REITs have targeted West Michigan’s blueberry farms in recent years, including two deals for $3.7 million this year involving Denver-based Farmland Partners Inc. COURTESY PHOTO

As with other sectors of the commercial real estate market, the increased activity for many types of agricultural land right now stems from the historically low interest rates buyers can access.

But with continued volatility in cash crops and in parts of the agricultural market, investors are taking an overall cautious approach to seeking out transactions.

The location and extent of activity in the agricultural sector varies greatly as sales of farmland are highly localized to areas as small as a portion of a county, said Adam Kantrovich, who provides farm management and agricultural education out of the Ottawa County branch of Michigan State University Extension in Fillmore Township.

“Even within a small area, there is a high level of variability,” Kantrovich said. “Changes in land values as well as demand are due to whether you’re in an area of specialty grains or cash crops.”

Overall, however, drops in grain prices over the last 18 months have led to a stabilization in land prices and decreased volatility, he said.

According to an April 2015 MSU Extension report, agricultural land rents around the United States jumped 43 percent from $97.21 per acre in 2007 to $173.23 per acre in 2014. That increase in price was coupled with the average price for corn going from $3.39 in 2007 to $6.67 in 2012 before falling to $4.11 in 2014.

“Now that we are in a downtrend or adjustment phase in the market, the ability of farmers to pay the same level of land rent will decline,” according to the MSU Extension report.

But that period of adjustment brings a variety of investors and landlords to the table, industry sources said. For one thing, succession planning is becoming an issue for many aging owners of family farms who are considering their options for an exit plan. That has landholders selling to a variety of investors, including other growers that are looking to expand, Kantrovich said.

Michigan, the second-most diverse agricultural state in the country, is also catching the attention of farmers and investors in the nation’s most diverse agricultural state: California. With the West Coast locked in a severe drought and given California’s high land costs, outside investors have turned their attention to Michigan, which is both good and bad, according to Kantrovich.

“It creates a problem with regards to the potential of increases in land values,” he said. “If someone tries to purchase as much land (as possible), it increases the value so the farm looking to expand that is locally-owned has to compete with the same outside resources that may have more funding than them.”

To Kantrovich’s point, public Real Estate Investment Trusts (REITs) in recent years have announced land acquisitions in Michigan, particularly the southwest part of the state.

In July, Denver-based Farmland Partners Inc. (NYSE: FPI) acquired a 181-acre Michigan blueberry farm for $2.5 million. Farmland said annual rental income on the farm was expected to reach 8 percent to 10 percent of the purchase price. The company did not disclose the location of the farm, but said it adjoined a 125-acre blueberry farm it acquired for $1.2 million in June.

Those deals follow Virginia-based Gladstone Land Corp. (NASDAQ: LAND) acquiring a 119-acre blueberry farm in Covert in 2013, as MiBiz reported at the time.

More recently, the Michigan Blueberry Growers Association announced plans for a blueberry processing plant in South Haven, according to an August report in the St. Joseph Herald Palladium. Part of the land involved in the deal would be leased to Westlake Village, Calif.-based Dole Food Company Inc., the report said.

That large, institutional investors are taking an interest in Michigan blueberries comes as somewhat of a surprise to Joe Hickey, vice president and chief appraiser at East Lansing-based GreenStone Farm Credit Services, an agricultural financing firm. In recent years, Hickey said Michigan blueberry production has been on the decline and the demand for processing is “way off.”

Overall, however, both Hickey and Kantrovich agreed that opportunities exist for those seeking to invest in the region’s agricultural land.

“We’re so highly penetrated in the agricultural sector that a lot of people come to us to purchase property,” Hickey said. “As long as interest rates stay low, there will be interest in ag properties.”

Read 4050 times Last modified on Monday, 28 September 2015 10:59

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