There’s good and bad news in farmland values and sales. The good? Land values have exhibited an underlying base of strength from several factors including historically low-interest rates, low supply of land for sale and adequate buying capital.
The bad? The recent increase in listings is driven in part by the current farm economy and the need for financially challenged producers to liquidate some or a portion of their land assets to cover operating costs and debt service, according to Farmers National Company.
“Farmers National is seeing an increase in the number of farmland sales by financially stressed producers due to multiple years of reduced income,” said Randy Dickhut, senior vice president of real estate operations. “Some of these sales are sold quietly and not exposed to the marketplace to get top dollar. Other sales are coming from producers who are pro-actively liquidating a land asset to improve their balance sheet and cash flow. Farmers National is now handling an increasing number of land sales and receiverships for lenders.”
According to Dickhut, the land value equation is seeing increased uncertainties that could weigh down the land market, noting that the company’s farmland sales are up 29 percent in the number of acres sold compared to 2018 for the same time period.
The biggest concern at this time in the agricultural land market is the financial health of producers, noted Dickhut, who directs real estate brokerage for Farmers National Company. U.S. agricultural is in its sixth year of a downturn with overall net farm income for 2019 projected to be down 50 percent from 2013.
Working capital has declined almost 70 percent since 2012 and inflation-adjusted farm debt is at the highest level since the 1980s, he said. Low commodity prices coupled with rising costs have squeezed profits and working capital causing farmer buyers of land to be more cautious, he added.
For Michigan farmland values and current sales activity, location and quality are key drivers of land prices according to Roger Hayworth, area sales manager for Farmers National Company.
“Good quality farmland normally sells well as will recreation properties in the right locations. But lower quality farmland saw a decline this past year,” Hayworth said. “The overall agricultural real estate market has taken a sluggish turn when compared to a year ago. The uncertainty created by trade issues and projections of continuing lower farm incomes clouds the horizon for farmers and land buyers.”
Buying interest for land has remained adequate for the amount on the market for sale, but the buyer profile has changed somewhat, according to Hayworth.
“The farmer buyer is being more cautious and more selective in the farms they will bid on. The 1031 exchange buyers have been active and continue to support current land prices. Investors are also active buyers depending on the type of land they are interested in and the desired returns,” he said.
Ag lenders are starting to report that some of their borrowers are experiencing financial stress from multiple years of low commodity prices and farm incomes. Working capital is declining with the tighter margins putting pressure on loan repayment capacity.
“If someone is thinking about selling their farmland or buying land as an investment, they for one need to know the local land market as each area is reacting somewhat differently which could influence price expectations. Buyers and sellers need to be knowledgeable in today’s land market or they need to seek assistance,” advised Hayworth.
Overall, U.S. agriculture remains in solid financial condition despite weakening on a number of fronts. Debt to asset ratios are worsening but remain below recent higher levels. The number of farm and ranch bankruptcies is increasing but are far below what was experienced in the 1980s. Land values that have held up better than expected have supported the growing level of financing required for some producers, Dickhut said.
With the known problems that agriculture and the land market are facing, there are also uncertainties that will have an impact on the sale and price of ag land. Immediate concerns include low grain and milk prices and growing season weather.
Trade issues continue to have short-term effects on commodity prices and production costs while the potential for ongoing negative impacts become possible the longer trade is disrupted. Interest rates look to be stable for the foreseeable future, but world economic performance is more uncertain, Dickhut said.
Agricultural land values have been surprisingly resilient over the past two years despite the continuation of depressed farm incomes. Supportive factors combined to hold land prices in most areas, especially for good quality farmland, he said. Concerns are building in the land market primarily surrounding the financial health of farmers and ranchers.
“As 2019 unfolds, the land market will remain on edge watching farm finances, weather, and trade issues,” Dickhut said. “The outcome of these and other unknowns will guide which direction land values will move over the coming months. With the land market on edge, buyers and sellers of land need the most trusted advice available to navigate the uncertainties.”