Farmland - Good Investment at High Price?

[Terrel L. Shields]

The past year has seen some record prices for crop land. This is the second year of a drought...some places hit hard both years. Crop insurance has its limits.

I wonder if some buyers are having a bit of buyers remorse when their corn is making 60% and cannot even plant soybeans for lack of moisture. We saw a huge run up in farmland prices in late 1970s - early1980s. It collapsed.

The investment in machinery today is insane. I find it hard to believe that the price of commodities is stable enough to justify very high land prices. Except for irrigate land where there is some assurance that the water is actually going to be there, could such prices be justified. I understand many of the irrigation districts in the west are unable to supply the water that they typically do and that is drying up many of the farms in droughty districts. You simply cannot depend upon the weather to be uniform year to year.

In Texas from 1947 - 1957 virtually every year was drought and in that period, the % of Texans on the farm went from 25% to 12%. And in 1957, it flooded and didn't cease raining for weeks when the drought was broken.

 

[farmguy]

Terrel,
have you ever read the time it never rained about the drought of the 50's? good read.

 

[Terrel L. Shields]

I know that in the mid 50's we had an influx of folks to this area that were from Texas. Our neighbors from 2 sides were from Texas and had starved out then. A fellow slightly older than me told me his father went bust in 1951 and went to work for another rancher west of Ft. Worth. After 2 more years that guy had to lay him off and that's when they came to Arkansas...which was plenty hot. In 54, the grasshoppers ate the bark off our peach trees and we lost every one of them.

This is the Palmer Drought index for Texas in the month of March

 

[Sid Holderly]

In the last farm bust interest was 18% and farm return was 4 to 4.5%. Today purchase interest is as low as 3.5 to 4% and return is 3.5 to 4.5%. Today the land rent will pay for the interest charge. In the last bust it took 4 acres of land to pay for interest on 1 acre. As long as farm return stays above CD rates investors will buy farmland.

 

[Caterina Platt]

In the last farm bust interest was 18% and farm return was 4 to 4.5%. Today purchase interest is as low as 3.5 to 4% and return is 3.5 to 4.5%. Today the land rent will pay for the interest charge. In the last bust it took 4 acres of land to pay for interest on 1 acre. As long as farm return stays above CD rates investors will buy farmland.

Good observation, but in drought times, CD rates beat a loss no matter how low. This isn't making sense at all for the short term.

I'm looking at bigger picture issues. Beyond this drought period, the ability to raise food could be of paramount importance and a very valuable commodity.

Who is it that is buying? That could be quite telling in itself.

 

[stefan olafson]

The drought is or will be something all investors should be considering. I'm in SE North Dakota, an area of abundant water these past few years. Last winter was one of the warmest on record and one of the driest. This spring the farmers had ALL their crops in way before historic planting dates. The crops are up and have quit growing, no rain or very little rain has caused a potential bumper crop to become a better than average crop. No rain this week and that better than average crop will become an average crop. No rain for two weeks or more (a good possibility looking at long term forecasts) and the average crop will be getting close to one the farmers may not want to harvest.

High sales of between $4,000 and $5,000 along with expaning farm operations will eventually spell doomsday for some operators.

Older farmers say we need to curtail crop insurance so it no longer guarantees an income, that is why there are no small farmers left. Or so they say.

 

[Sid Holderly]

The farm land investor already has his income (the rent) in many cases. Those on spring and fall rent splits may have a hard time getting all of the fall rent. Rents will likely slide a little lower next crop season, but there are many willing to pay the asking rent, therefore the investors far pretty well in the drought. The farmer doing the work is the one who has to get by with no income till the next season.

It is very dry hear in NW IN with less than 3" of rain since planting (early April this year). Some are cutting down corn that will not have an ear. A few spots look OK but most will be hurt by 30 to 50% and a small percentage with a total loss. Soybeans are now starting to dye, so rain is needed very soon or they also will be drastically reduced in yield. The low heavy black ground is surviving. The clay knobs and sand hills are mostly gone. At this time I have 2 thermometer showing 101 at 4:00 in the afternoon.

 

[Caterina Platt]

I would be very interested to find out who these investors were. There may or may not be any significance or any trend we can point to, but I'm just curious.

Let's just say I'm seeing if the conspiracy theorists reports from a year or so ago are panning out.

The conspiracy silliness could be driving tin foil hat types to buy farmland at inflated prices, or it could be that the rich, evil, puppet masters really are stock piling fertile farm land in an effort to control our food supply in the near future.

Could be a total red herring.

It just seems terribly odd that in bad crop times and bad economic times, the land prices are up.

 

[Burney Lightle]

I can't speak to the conspiracy theory, but in the Mid-South (where I work) you have the following factors driving prices:

1. there is a large arge number of institutional buyers with millions of dollars to invest in farmland, and
2. Several wealthy families from South America have purchased in excess of 125,000 acres in the Mississippi Delta in the past two years...

Both of the factors, combined with high commodity prices have created an "imbalance in supply and demand" that has driven cropland prices to levels never seen in this region...(examples: Bootheel of MO a recent sale of 11,000 acres at over $5000 per acre and at the southern most end of the Delta, Catahoula Parish, LA, 7,600 acres sold for nearly $3,800 per acre...prices per acre tend to be lower the further south you go)...

The other day, a client asked me why the farm they were purchasing did not appraise for what they were paying and I told him that my sales were "4 months old"...

The positive thing with the Mississippi Delta (for those that don't know, extends on both sides of the Mississippi River from the Bootheel of MO south to Natchez, MS and generally 50 to 100 miles east and west of the river) is there is good ground and/or surface water; most of the prime cropland is irrigated...

Dryland crops look pretty bad, but irrigated crops appear to be doing OK...

 

[Caterina Platt]

Here's what feeds the theorists:

[url]http://www.bloomberg.com/news/2011-08-10/being-like-soros-in-buying-farm-land-lets-investors-reap-16-annual-gains.html[/URL]

[url]http://www.naturalnews.com/033319_food_prices_farmland.html[/URL]

[url]http://commonamericanjournal.com/?p=29540[/URL]