Predicting The Future

[Michigan CG]

The land is agricultural.

Ag land in the mid-west depends on the price of corn. No one is making any money on $3.50 corn.

 

[Mark K]

Ag land in the mid-west depends on the price of corn. No one is making any money on $3.50 corn.

But yet they continue to pay $7,500-$8,500/acre for 175-200 bushel land and pay $300,000+ for new combines.

I'm thinking they're making money.


As to the OP, go ahead and do it. Base in on the last 75 years with a lot of disclaimers and tell the client that if you're wrong, he should feel free to file a claim on your E&O in the year 2092.

 

[Gobears81]

Predicting a 50-year future value of ag land could involve a pretty heavy dose of macroeconomics. On the demand side, what will the world's population be in 50-years, how will per capita income change, and how will demand per capita change for corn and soybeans? On the supply side, how will the inventory of farmland change over the next 50-years and what type of technological advances will be made to increase efficiency of farming operations? Those are certainly not a complete list of considerations, but it would theoretically translate to shifts in commodity prices over this time frame, and consequently, ag land values. A phone conversation with economists or even senior farm appraisers could potential answer several of these questions.
Another option to consider is the simple property model: Y=R+G. What are the IRR expectations of those buying farmland? Interviewing a farmer would probably not yield good answers to your questions, but I would imagine that discussing return expectations with larger buy-and-hold investors of farmland could. Answers would probably vary, but with cap rates being about 2% around here, and presumably in your area also, one could deduct that to yield growth expectations. So if they say that they are hoping for a 5% annual return, growth would be 3%. That growth rate is in perpetuity, although 50-years is not all that different from perpetuity in PV terms, so you could cite that as evidence to future growth rate predictions indicated by the market.

 

[Terrel L. Shields]

I'm thinking they're making money.

They are not, treading water. Dairy farms are rare here, but 25 years ago, common and I've appraised dozens. Not one dairyman I met knew what his farm made. They just go back and borrow more every year or two until the bank says "no." Same with grain, $1,000,000 minimum for tractors, planters, combine, all to turn 8% on your investment before labor and taxes. Without crop insurance would not last a year.

 

[leasedfee]

Notwithstanding the excellent caveats and commentary especially for depressed regions, ground leases sometimes have to forecast a 30, 40, or 50 year reversion. Though far into the seemingly future, the reversion can be substantial, especially at low yield rates. The lower the yield rate, the longer the time-value economic life. What to do?

Studies have found that real property values are parallel with inflation, notwithstanding boom/crash cycles. Sales from 10 or even 20 years ago can be insightful. This is especially true if the property’s operations, use, and condition have remained mostly unchanged. It also helps if the neighborhood’s appeal has remained consistent. The US long-term inflation since 1950 was 3.74%; long-term inflation since 1970 is 4.41%. Long-term inflation has been 2.60% since 1990 (compounded annually). The key conclusion is that land values follows inflation. This is consistent with findings by Dr. Robert Shiller and a study of a 450 year (!!) repeat-sales history of homes in Amsterdam that long-term housing returns are at or just a tad above inflation, in so much that price changes also factor-in capital repairs.

What opened my eyes to this was a Denver CBD parcel whose 1910 sale price was reported in the newspaper about 2003. The compounded appreciation rate was about 3.5%+/-. This was before the "official" sub-1% inflation rates of the last 15 years.

Footnotes:

1. Asset Prices, Monetary Policy, and Bank Regulation, Robert Shiller, Ph.D., undated. “All these [11%+ home price rate of appreciation] expectations are way out of line with historical experience. Real (inflation corrected) US home prices have increased only 0.4% a year, after correction for inflation between 1890 and 2004.”
2. Dr. Piet M.A Eichholtz, “Housing Market Rents in the Long Run; Amsterdam, 1550-1850”, with M. Theebe, Journal of Economic History, 2006, unpublished working paper.
3. William C. Wheaton, PhD, finds similar conclusions with commercial real estate, “100 Years of Commercial Real Estate Prices in Manhattan”, Real Estate Economics, Vol. 37, No. 1, Spring 2009.
4. Michael R. Pecorino, MAI, Projected Rent Spikes: Can You Have the Good without the Bad, The Appraisal Journal, Spring 2011

 

[Mark K]

Without crop insurance would not last a year.

And this is why they're making money.

Taxpayer subsidized, guaranteed revenue or guaranteed yield crop insurance for which the farmers pay approximately 40% of the premium and taxpayers pick up the other 60%. Without risk, why wouldn't a farmer buy 175 bu. corn land for as much as $10K/acre ($8-$9K typical, $10K occasionally). The more land, the more guaranteed revenue.

Don't know about dairy farms; not many left in this area.

 

[Terrel L. Shields]

And this is why they're making money.

Taxpayer subsidized,

Nonsense. Farm crop insurance is little different from flood insurance or FHA / VA financing. Loans are backed but private lending. Bad year, premiums jump but USDA pays a set percent. If you want a massive transfer of land from private to REITs and large corporate monopoly then stop it...2011 was one of worst drought years and US contribution only amounted to $8 billion about $40 B over the life of the farm bill. Without it you'd lose 10-20% of farmers each year AND pay double/triple for food. Further dairy, beef, chicken get no such break since insurance is not available.
Crop insurance covers the cost of production and little else. If farmers could force the market to pay what corporations require, they could absorb the bad years. Most corporations expect to generate 100% of the value of assets in annual sales. Farmers dream of generating 30% of the value of their assets and many survive on less than 20%. My farm has never turned a gross of more than 10% of the land value and only due to land inflation is it a sensible investment and utility as farmland isn't driving value here, subdividing into small lots is. In farm country, that option isn't available. Average cash rents fell 10% last year, $144/acre or 25% of net sales on land bringing $7500/ac. Wanna invest?

 

[Mark K]

Nonsense. Farm crop insurance is little different from flood insurance or FHA / VA financing.....

The recent crop insurance overhaul a few years back changed all of that. The majority of the crop insurance premium is paid (subsidized) by the gov't (the word 'taxpayer' fits well here also).

https://www.npr.org/sections/thesal...rop-insurance-a-pricey-safety-net-for-farmers

Plenty of other sites explain the new ag welfare program if you care to research it.

There's more financial risk in appraising than there is in farming these days.



https://www.insurancejournal.com/news/national/2017/05/25/452112.htm

"Typically, farmers pay a portion of their insurance premiums and USDA covers the rest, said Jeff Harrison, a lawyer who represents the Crop Insurance Professionals Association."

USDA, as in taxpayers.

 

[Terrel L. Shields]

The majority of the crop insurance premium

I believe it is 40%. The alternative is for food to go much higher, but the problem is that farmers have no unified union, like appraisers. The large Ag companies would throttle them without crop insurance. Why do you think Tyson does not grow their own grain or raise their own birds? Because they can leverage their size to buy the grain cheap (whether it is covered or not) and Tyson cannot grow birds as cheaply as independent farmers who go heavily in debt and fail at a high rate. No skin of Tyson's back. They have no money invested in these million dollar barns. They only have to have birds and provide feed. The labor, the water, the insurance is provided by the grower. Zero investment in barns for Tyson.

With crop insurance, payments are made only when the crop is certified by the insurer as damaged, and the payment covers the expenses and little else. So in the end the farm made no money, his equipment is a year older and so is he/she. These payments are made by private insurance. The feds provide part of the premium due to the high losses and private insurance won't cover itself otherwise.

As for cost - Food stamps cost $80 billion a year...or 10x what premium payments are...and the farmer gets nothing for signing up to crop insurance. They save only a portion of the premium which they certainly can't put in their pocket. Again that only applies to grain crops, livestock doesn't qualify for crop insurance. The risk is extremely high for farmers period.

 

[Mark K]

I believe it is 40%.

With crop insurance, ..... the payment covers the expenses and little else.

Taxpayers pay 60%, farmers 40%.

You're thinking of the old crop insurance program. Today's covers more than expenses if you want it to buy the coverage and why wouldn't you if you're only paying only 40% of the premium?

The 2012 drought in this area reduced corn yields to about 50-60 bu. (normal is 150-200). Beans, 15-20 bu. (normal is 50-60). Most of the farmers in this area were bragging that they made more money that year then most years.

That winter and next spring, some of the larger operators (5K to 20K acres) were bidding up farm land as high as $13,000/acre at auctions because they were so flush with crop insurance money, spending money like it wasn't theirs.