Factors Affecting Farmland Markets Bruce J. Sherrick University of Illinois The Changing Landscape...

Factors Affecting Farmland Markets

Bruce J. Sherrick University of Illinois

The Changing Landscape of Ag Banking in IllinoisIBA Ag Banking Conference

Sept. 7-8, 2006 – Springfield Illinois

visit us at: http://www.farmdoc.uiuc.edu/

Outline:

• Background, Ag B/S and Lender Shares

• Valuation and Income info – how linked?

• Investment performance of farmland

• Illinois land market updated survey information: who, why, what and how…

• Contemporary issues for farmland markets

U.S. Ag Sector Balance Sheet summary

Item ($millions)1970 1980 1990 2000 2006f

Farm assets 278,864 983,305 840,609 1,203,215 1,671,637Real estate 202,417 782,819 619,149 946,428 1,395,800Non real estate 76,447 200,486 221,459 256,787 275,837

Farm debt 48,753 166,824 137,962 177,637 218,717

Real estate 27,506 89,692 74,732 91,109 122,929 Nonreal estate 21,247 77,131 63,230 86,529 95,788

Equity 230,112 816,481 702,647 1,025,578 1,452,920 Selected Ratios:

Debt/equity 21.2% 20.4% 19.6% 17.3% 15.1%Debt/assets 17.5% 17.0% 16.4% 14.8% 13.1%Real estate value/equity 88.0% 95.9% 88.1% 92.3% 96.1%Real estate value/assets 72.6% 79.6% 73.7% 78.7% 83.5%Real estate debt to D 56.4% 53.8% 54.2% 51.3% 56.2%

US Totals, source USDA

Ag Sector Balance Sheet - keys

• Farmland represents 83.5% of farm assets and about 56% of farm debt (8/2006)

• Low aggregate leverage relative to other sectors (currently approx. 13.1% ag. D/A and shrinking slowly)

• Some shifting among debt providers, little shift between debt and equity

• Active equity market absence

Debt shares by Lender through time

Ag Real Estate Debt Shares

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

Year

mar

ket

shar

e Farm Credit System

Farm Service Agency

Commercial banks

Life insurance co.

Individuals and others

Debt shares by Lender through time

Ag Non Real Estate Debt Shares

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

Year

mar

ket

shar

e Farm Credit System

Farm Service Agency

Commercial banks

Individuals and others

“Illinois farmland will only experience about 4-5% average

appreciation in 2005” -Bruce Sherrick, 2004

History repeated… again“We have two great sources of profit in farming: first, rise in

the value of the land; and second, profit on the production of farm crops. The first has been the chief source.”

“I was wrong. Again.” -Bruce Sherrick, 2004, 2005, 2006, etc.

- George Morrow, 1886

Illinois Farmland Markets…

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

year

pri

ce (

$/ac

re)

Ave. Farmland Prices - Illinois

source:USDA

cont. compounded increase of 5.7% per year 1970-2006

Capital Gains Rates and Values

Farmland Values and Capital Gain Rates

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

Year

Cap

ital

gai

n (

%/y

ear)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Capital Gain Rate Ave. Farmland Prices - Illinois

Components of return to Farmland

-40%-30%-20%-10%

0%10%20%30%40%

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

Capital Gain Rate Current Income Total Return - Illinois

Factors affecting farmland values

• Thin Markets – highly inelastic local demand• Performance relative to other investments• Composition of returns changing (farming, vs.

recreation, development and 1031 influence)• Recent income levels, interest rates• Changing lease markets, absentee ownership

• Thin – average of under 1% annual sales, arm’s length, available competitively, actual farmland intended usage– limited option to expand with contiguous/proximate

land through purchase– increases importance of lease markets in value

determination– “lumpy” land sales relative to leasing…leads to some exceptional localized events and

difficulty in assessing “average” value

Farmland Turnover -- Illinois

History of Farmland Returns as Investment

• Long progression of capital gains, one period of losses – data period important when assessing performance

• Capital Gains Rates (annual geometric):– 1950-2000: 5.6%– 1970-2000: 5.7%– 1980-2000: 2.0%– 1970-2006 Q2: 5.7% (est.)– 2004-2005 Illinois average increase 28% (USDA)– 2005-2006 Illinois forecast increase 15% (USDA)

• Plus: current income in 3-5% range from rent/operations

Farmland as an investment

• Academic research shows: – Low systematic risk – behaves much like a fixed

income financial asset – High or adequate returns given risk

counter to premise of many debates on “low returns”

– Role as inflation hedge (positive correlation)– Market friction caveats, explanations

• Portfolio models favor inclusion of farmland in investment portfolios – to greater degree than observed in reality

Correlations with Illinois Farmland Returns, 1970-2005

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

PPI

CPI

TBsm3m

All REITS

EAFE

S&P500

Aaa

Correlation with other financial assets’ returns

Returns and volatility, 1970-2005

EUROPEDow JonesNYSE

EAFE

Illinois

Hybrid REITS

BBALibor

ED3M

00

T-10y

SLbond

0

Baa

000

CPI

Mortgage REITS

0%

2%

4%

6%

8%

10%

12%

0% 5% 10% 15% 20% 25% 30%

St.Dev. of Returns

Av

e. A

nn

ua

l Re

turn

Relatively smooth returns seriesAnual Return

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1970 1974 1978 1982 1986 1990 1994 1998 2002

Year

Re

turn

Illinois PPI CPI TBsm3m All REITSEAFE S&P500 Aaa Equity REITS Mortgage REITSHybrid REITS BBALibor ED3M

… and fairly attractive levelsAverage Holding Period Rate of Return - held until present

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

Date Purchased

Av

e R

etu

rn -

he

ld u

nti

l 20

04

Illinois PPI CPI TBsm3m All REITS EAFE S&P500

So what drives the Farmland market?

• Within Illinois, considerable risk differences, esp. North to South

• Risk-adjustment within class?– cash rent series by county (FBFM)– cash gross returns by county (farmdoc)– test fraction of expected return paid in form of

cash rent

• Strong evidence of within-class response

Farmland as an investment• Traditional Capitalization arguments: considerable

difference in rent and productivity lead to…..

Illinois

Pope0.05

Jefferson0.06

Franklin0.07

Clay0.08Marion

0.09

Williamson0.09

Hardin0.09

Perry0.09

Wayne0.10

Alexander0.11

Johnson0.11

Hamilton0.12

Washington0.12

Randolph0.13

Massac0.13

Bond0.14

Fayette0.14

Jackson0.15

Richland0.15

Lake0.16

Pulaski0.16

Union0.17

Clinton0.17

Saline0.17

White0.24

Cook0.25

Monroe0.25

Lawrence0.26

Effingham0.27

Edwards0.30

Jasper0.31

Madison0.31

Crawford0.35

Saint Clair0.35

Wabash0.36

Gallatin0.39

Brown0.40

Adams0.41

Calhoun0.42

Schuyler0.43

Will0.47

Cumberland0.48

Du Page0.48

Pike0.49

Clark0.51

Jersey0.52

Hancock0.54

Montgomery0.54

Kankakee0.54

Fulton0.56

Mason0.56

Winnebago0.57

McHenry0.57

Macoupin0.60

Ford0.60

Boone0.61

Greene0.62

Shelby0.62

Livingston0.62 Iroquois

0.63

Kendall0.63

Jo Daviess0.63

Scott0.65

Grundy0.67

Stephenson0.68

Vermilion0.69

Whiteside0.70

Rock Island0.72

Peoria0.72

Lee0.73

Marshall0.73

Cass0.74

McDonough0.75

Ogle0.76

Henry0.76

Kane0.77

Edgar0.77

Mercer0.77

Coles0.78

La Salle0.78

Carroll0.78

Knox0.79Henderson

0.79

Putnam0.80

Woodford0.80

Douglas0.80

Stark0.81

Menard0.81

Champaign0.82

Bureau0.83

Tazewell0.83

McLean0.83

De Kalb0.84

De Witt0.84

Christian0.85

Warren0.85

Logan0.85

Morgan0.86 Moultrie

0.87

Macon0.87Sangamon

0.88

Piatt0.89

Illinois Economic Productivity Index0.00 to 0.130.13 to 0.250.25 to 0.430.43 to 0.570.57 to 0.690.69 to 0.780.78 to 0.830.83 to 0.90

Illinois

Alexander

Calhoun

CookDu Page

Hardin

Jersey

Lake

Perry

Pope

Putnam

41

52

54

55

57

60

60

60

60

61

62

64

65

65

67

67

68

68

69

7071

72

74

76

78

86

88

90

90

9393

94

101 102

103

103

105

105

107

108108

108

109

109

110110

111

112

117

117

119

121

121

122

122

123

123

125

126126

126

127

127 127

127

128

129

129

129

130

130

130

133

133

134

134

134

134

135136

136137

137

137

139

139

140

140

140

141

141

142

Rent per acre0 to 2020 to 4040 to 6060 to 8080 to 100100 to 120120 to 140140 to 160

Farmland as an investment• Nothing much in aggregate…. Swamped by other effects

So, U of I Study of factors influencing farmland values finds following significant items (Huang, Sherrick, Miller, Gomez, 2006)

•Size of tract (-)

•SPR (+++)

•Distance to Chicago (++)

•Distance to metro location (++)

•Ruralness indicators (--)

•CPI (++)

•Population (+)

•Income (+)

•Livestock activities (+/-)

Illinois

Alexander

Calhoun

CookDu Page

Hardin

Jersey

Lake

Perry

Pope

Putnam

858

927

931

1046

1052

1080

1085

1088

1107

1111

1120

1177

1187

1227

1243

1251

1263

1276

1294

1308

1311

1362

1384

1405

1407 1407

1425

1430

1467

1492

1526

15341563

1577

1588

1649

1653

1672

1691

1694

1806

1814

1820

1820

1884

1916

1946

2014

2094

2098

2138

2147

2163

2174

2188

2189

2199

2257

2274

2281

2308

2342

2382

2428

2523

2557

2557

2566

2577

2625

2654

2676

2693

2737

2753

2783

2787

2789

2884

2935

2955

29643083

3124

3151

3313

3384

3718

3738

3865

3898

4289

Price per acre0 to 600600 to 12001200 to 18001800 to 24002400 to 30003000 to 36003600 to 42004200 to 4800

Land Market Information – ISPFMRA annual survey

ISPFMRA2005-2006 Land Value Trends

Area

PrimeFarmland

GoodFarmland

AverageFarmland

RecreationalLand

Northern Region

(1 & 2)

+12% +13% +18% +25%

Central Region

(3, 4, 5, 6, & 7)

+8% +5% +9% +16%

Southern Region

(8, 9, & 10)

N/A +9% +13% +13%

ISPFMRA 2006 -- Survey says…

Ave Cash RentPer Acre

(Typical of all leases in region)

7000 8% Up 10% 170 0% 175

Good Productivity 6000 9% Up 10% 155 3% 150

Average Productivity 4500 18% Up 10% 135 0% 130

Transitional Tracts 18000 12% Steady

Transitional to Active Development 50000 11% Up 10%

Ave. Cash rent/acre on

recently negotiated

% Change from prior year

Region 1 - Northeastern Illinois Farm Classification

Total Value Per Acre (Typical)

% Change in $/acre from prior

year

Change in rate of land turnover (up, steady,down) and

%




Excellent Productivity $4,500 - $5,000 Up 7% 180 0 180

Good Productivity $3,200 - $4,000 Up 7% 166 0 170

Average Productivity $2,000 - $3,000 Up 7% 120 0 120

Transitional Tracts $8,000 - $16,000 Up 7% N/A

Ave. Cash rent/acre on

recently negotiated

% Change from prior

year

Region 6 - Central IllinoisFarm

ClassificationTotal Value Per Acre (Typical)

% Change in $/acre from prior year




Good Productivity 3425 up 10% steady 120-150

Average Productivity 1669 up 14% steady 70-90

Recreational Land 1615 up 14% up 5% n/a

Region 10 - Southern Illinois Farm Classification

Total Value Per Acre (Typical)

% Change in $/acre from prior year

Change in rate of land turnover

(up, steady,down) and %

Estate sales prevail ..

Sellers of Farmland, Illinois, 2005.

1

17

6

43

22

11

0 10 20 30 40 50

Others

Individuals

Institutions

Estate sales

Retired farmers

Active farmers

Percent

Reasons for Selling Farmland, Illinois, 2005.

1

5

4

37

4

7

42

0 10 20 30 40 50

Other

Close-out undivided interest

Re-orient investment

Received a good price

Forced liquidation

Need cash

Settle estate

Percent

Estate settlement leads motivations..

Investors remain main buyers..

Type of Farmland Buyers, Illinois, 2005.

2

10

1

10

36

10

31

0 10 20 30 40

Other

Recreational buyers

Institutions

Local investors

Non-local investors

Relocating farmers

Local farmers

Percent

Attributes of buyers include …

• 56% of buyers used 1031 exchange funds - 2005– up from 48% year prior, down first half of 2006.

• 62% of buyers did not use debt capital– increase of 10% from year prior

§1031 Buyers driving market up..

Reasons for 2005 Farmland Price Increase, Illinois.

7.9

4.1

3.6

2.6

1.6

1.1

0.1

0 2 4 6 8 10

Large number of 1031 buyers

Limited supply of farmland

Low interest rates

Large number of non-1031 buyers

High corn and soybean yields

Government support programs

Other

Score

Location of 1031 Buyers, Illinois, 2005.

Chicago Area57%

St Louis7%

Outside Illinois

6%

Local Area24%

Other Illinois Area6%

Chicago impacts dominate..

Price Increase Expected in 2006

Expected Change in Farmland Price During 2006, Illinois.

1

4

17

61

15

2

0 10 20 30 40 50 60 70

Decrease more than 10%

Decrease between 6 and 10%


Increase between 0 and 5%


Increase more than 10%

Percent of Respondents

Stable Trend expected for 2007

Expected Change in Farmland Price During 2007, Illinois.

0

2

31

61

4

2

0 10 20 30 40 50 60 70

Decrease more than 10%





Increase more than 10%

Percent of Respondents

Cash rent and custom farming returns thought to be higher..

Lease type Excellent Good Average Fair

Traditional crop share 120 110 95 78

Cash rent 150 135 120 103

Custom farming 160 145 130 100

Land Quality

Table 1. Per Acre Farm Incomes that Landlords Receive for Different Lease Types and Land Qualities, 2005.

------------------ $ per acre ---------------------

Cash Rent variability by quality..

Lease type Excellent Good Average Fair

High 1/3 190 175 150 125

Mid 1/3 170 150 130 110

Low 1/3 150 130 110 90

Land Quality

Table 2. Per Acre Cash Rents for Top 1/3, Mid 1/3, and Low 1/3Cash Rent Leases by Land Quality, 2005.

----------------- $ per acre ----------------------

Cash rent leases still most prevalent

Types of Leases in 2006.

36

7

5

45

6

1

0 10 20 30 40 50

Traditional crop share

Modified crop share with supplemental rent

Modified crop share (other than supplementalrent)

Cash rent

Custom farming

Other

Percent

Growth expected in fraction of cash rent leases..

Types of Leases Projected in 2006 and 2010.

0 10 20 30 40 50 60 70

Traditional crop share

Modified crop share with supplemental rent

Modified crop share (other thansupplemental rent)

Cash rent

Custom farming

Other

Percent

2006 2010Year

Contemporary Issues:

• Role of government (payments average 24% of income, 32% pre-, regulation, and changing program design and emphasis)

% farm income from government direct payments

0%

10%

20%

30%

40%

50%

60%

70%

1970 1975 1980 1985 1990 1995 2000 2005

Year

Sh

are

• Energy Bill or Farm Bill? Food v. Farm programs? • Property Tax Updates• Term Structure impacts • What’s on the “Horizon” with competition• Basel II and other badly kept secrets

Questions/Comments?

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Factors Affecting Farmland Markets Bruce J. Sherrick University of Illinois The Changing Landscape...

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Transcript of Factors Affecting Farmland Markets Bruce J. Sherrick University of Illinois The Changing Landscape...