Agricultural land values have remained relatively stable throughout most regions in Michigan, even though many farmers continue to face serious headwinds.
According to data from East Lansing-based agricultural lender GreenStone Farm Credit Services, cropland in southern and southwest Michigan and the northern “Thumb” region showed no change in value over 2018. The areas of the southern Thumb and the Saginaw Valley decreased the most, down 2.5 percent and 5.9 percent, respectively.
Cropland in the Saginaw Valley tends to be the most volatile because of the influence of sugar beet production, which has ranged in value per acre from between $8,000 to $13,000 over the past several years, according to GreenStone.
Paul Anderson, executive vice president and chief credit officer at GreenStone, said land values are a factor of interest rates and profitability.
“If a farmer is making money in his business, he wants to grow the business, and if he has extra cash because the cropland is generating a good net income, he will turn around and reinvest it into more land,” Anderson told MiBiz. “That’s what will drive land prices.”
GreenStone, which has $9 billion in assets, is the leading agricultural lender in Michigan and northeast Wisconsin, and one of the country’s largest associations in the Farm Credit System.
This year, the financial health of farms may be the biggest overall concern in the land market, especially as the agricultural sector has faced a significant, multi-year downturn, according to industry experts.
Overall, net farm income is expected to increase slightly in 2019, according to last month’s Farm Income Forecast from the U.S. Department of Agriculture. If realized, in inflation-adjusted terms, net farm income in 2019 still would be 35.5 percent below its peak of $136.5 billion in 2013 and below its 2000-18 average of $90.1 billion.
Reports from agricultural lenders suggest that some borrowers are experiencing financial stress after years of low commodity prices and incomes. To that end, agricultural bankruptcies are up 13 percent from last year, according to the Federal Deposit Insurance Corporation.
As well, farm real estate debt is expected to reach $257.1 billion in 2019, a 4.6-percent annual increase in nominal terms and a 2.8-percent rise in inflation-adjusted dollars, according to the USDA Economic Research Service. Farm real estate debt as a share of total debt has been rising since 2014 and is expected to account for 61.8 percent of total farm debt this year.
Living with variables
After a historically cold and wet spring, this year could be an even greater challenge financially for crop producers.
“We certainly empathize and are watching our customers be challenged here with the weather,” Anderson said. “In the state of Michigan, we have a huge degree of variability, so the challenging part of this is that every individual customer’s situation is slightly different.”
The amount of ground that remained unplanted this season influenced the GreenStone land values report, according to the company. Overall productivity and profitability are still unknown because of the late planting and acres left idle.
The quantity and quality of many of this year’s harvests are expected to be down. Corn yields are projected to be at the lowest level since 2012 — a year of significant drought — and soybeans yields will likely be the smallest since 2013, according to the latest AccuWeather crop production analysis.
Although year-to-year shifts in weather may be reflected in the upcoming values — which represent activity from the previous twelve months — they will not affect lending practices as dramatically, according to Anderson.
“You buy land and then you pay it back over future cash flow or revenue streams for the next 20 to 30 years,” he said. “We have to make long-term decisions on how much we’ll lend into that acre of real estate and what we try to do is sustainable long-term average commodity prices versus what is (or isn’t) blowing up land values.”
For example, when commodity prices were at record highs from 2002 to 2014, GreenStone still based debt caps on much lower levels, according to Anderson.
“We knew those commodity prices of $7 corn were not sustainable,” he said. “So we made our lending decisions on basically that $4 corn level. Therefore, during that period of time, we actually reduced the amount of money we would borrow against an acre of land.”
GreenStone uses private industry sources as well as the USDA to forecast long-term commodity prices and how much the company will lend against each acre of land, he said.
Although lending practices may remain stable, GreenStone is preparing for the number of financially-challenged producers to increase this fall and throughout next year.
“We expect our workload is going to pick up this year because we know a lot of our customers are challenged with the upcoming season, but we feel good about the fact that we are ready to work with them and do so in an orderly manner,” Anderson said.
Decoupling values?
The long-term trend in land values has been growth in prices with periodic downturns reflecting a number of influences, including commodity prices, interest rates and the general economy. That’s according to a recent report from the Michigan State University Department of Agricultural, Food, and Resource Economics, which has been collecting data on land values since 1991.
Over the lifetime of the MSU data, the average price of all agricultural land increased about 6 percent. At that rate, values will double in about 12 years.
The fact that land values have remained relatively flat or are even increasing in some areas, despite economic downturns, is a change from the norm, according to Theresa Sisung, associate field crops and advisory team specialist at the Michigan Farm Bureau.
“I think a lot of people expected that we would start to see land values going down just because the economy has been such a struggle, but we’re really not seeing that,” she said.
In the past, when the farm economy would struggle, land values would decrease — but so far, this economic downturn has proven to be different.
“What they’re seeing is that really it’s almost become the inverse for the last few years where even though the farmer economy is struggling, those land values are either fairly steady or actually ticking up a little bit,” she said. “It’s a little bit surprising just because we have been struggling so much.”
The consolidation of the industry may be one cause of the change.
“Some of the smaller farms are going away and we’re getting into some of these larger farms. Then some of the larger farms are having to pay a little bit more so that they can expand,” she said.
In addition, dairy farmers are “getting out of the business” in increasing numbers, she said.
The GreenStone analysis found land values for larger Michigan dairies remained unchanged in 2019 after a 5.5-percent decrease in 2018 over 2017.
The highest-priced agricultural land in Michigan is capable of producing fruit and is located in proximity to Lake Michigan, according to the MSU report.
According to the data, land that is planted or capable of growing fruit trees is highly valued not only because of its earnings potential from harvested fruit but also because of non-agricultural demand related to general real estate value and, in particular, overall demand for property close to Lake Michigan.
“That’s some of the prime real estate when we’re looking at Grand Rapids expansion and people wanting to move along the lakeshore,” Sisung said. “That is some of that prime land, so it’s not just being valued for agriculture, but it also has a lot of potential for urban development as well.”
