The Housing Bubble

A weekend topic starting with Pork Business. “The coming year is pivotal for agriculture because we will find out if we have entered a stabilization zone or if we begin another leg down, says Terry Barr, senior director, CoBank. Barr, along with fellow ag economist David Kohl, highlighted key differences in the current setback in farmland values and the 1980s collapse at the American Society of Farm Managers and Rural Appraisers annual conference. ‘World economies are still in transition after what their central banks and governments did to stimulate their economies out of the financial crisis,’ Barr notes. ‘This means we will have sustainable, moderate growth in demand for commodities but not what’s needed for another explosive burst.’”

“Central banks have added $14 trillion to their balance sheets. The U.S. Federal Reserve added $3.5 trillion alone. Overall, the next three to five years will still be challenging for agriculture as the world works through the hangovers from the massive stimulus injected into world economies to ward off the financial crisis.”

“‘The 1980s was a credit bubble, now we’re in an asset bubble,’ notes Kohl, professor emeritus, Virginia Tech. ‘This recent run-up in farmland values has much more equity and working capital behind it. Marginal land is the first to correct, and we’re seeing those values down as much as 25% in some areas.’”

“With a glut of grains, oilseeds and commodities, Kohl says it will take a surprising change in production to lift commodity prices. ‘The good news is global economic growth is synchronized. The emerging market economies are moving higher together, but they need to grow at a 7% to 9% annual pace to lift U.S. commodity prices.’ Fortunately, the exposure of U.S. agriculture to energy prices has decreased as the U.S. has become a major oil producer. ‘About $8 to $10 spent on ag inputs is spent on something related to oil,’ Kohl notes. ‘But the U.S. is no longer dependent on crude oil imports and has become a major producer. It use to be $60 to pump U.S. crude oil. Now it is closer to $40 a barrel and will soon be $20 a barrel.’”

From Agrimoney. “US farmland prices have continued their downward trend to start 2018, but the pace of decline has slowed, a university study showed, in the latest of a series of reports hinting that the market downturn may be passed its worst. A farmland index compiled by Creighton University came in at 42.2 for January, remaining below the 50.0 level indicating a neutral market, but up 2.4 points month on month. Indeed, the figure was the highest for any month since July 2014, in the early stages of the farmland price slide which, on Creighton figures, has continued unbroken for a little over four years.”

“January was the ‘50th straight month the index has fallen below growth neutral,’ said the university, which draws its report from a survey of lenders in major agricultural states, from North Dakota to Colorado.”

“‘We think this is just kind of a stabilising time,’ Randy Dickhut, senior vice president of real estate operations for Farmers National, told the Omaha World Herald. However, the underlying momentum remained downward he adding, saying that ‘I’d still say there’s a trend that it will soften more. We don’t think we’re done going down.’”

The Omaha World-Herald. “The rural Midwest remains in an economic slump, and worries about the future of the North American Free Trade Agreement are adding pessimism to the outlook for 2018, a Creighton University survey of rural bankers showed. About four out of 10 said loan defaults would be their greatest economic challenge in 2018, said Creighton economist Ernie Goss. The bankers, from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming, have indicated economic growth in three months out of the past three years. Slumps continued in farmland prices for the 50th straight month and in farm equipment sales for the 53rd straight month.”

“But bankers in some areas said land values were holding steady, and so far few farm owners have reduced rents that farm operators are paying.”

From Agweek. “As we begin 2018, it’s interesting to look back on where farming has been recently and where farming is going. As we go to press, the price of the three big commodities at the local elevator is as follows: Wheat is $5.80 per bushel, soybeans are $8.65 per bushel, and corn is $2.89 per bushel. Using benchmark yields for farmers in my neck of the woods, that means a farmer with 50 bushel wheat would gross just shy of $300 per acre in revenue. Thirty bushel soybeans would gross just shy of $260 per acre in revenue. And 125 bushel corn would gross a little more than $350 in revenue.”

“Look back to 2011, the base price for hard red spring wheat was $8.38 per bushel, soybeans were at $12.50 per bushel and corn was just north of $6 per bushel. So, the same farmer with 50 bushel wheat was grossing roughly $420 per acre, $375 per acre for soybeans, or a whopping $750 per acre for corn.”

“Here’s my question: Why haven’t land values come back to earth more pronouncedly when revenue per acre off that land has decreased between 30 and 50 percent? Why aren’t land rents coming down more than they have? Why isn’t land selling for far less per acre than it is?”

“In terms of distribution of farmland and the economics of raising certain commodities on this farmland, one must assume that even at today’s commodity prices, there must be some higher value to farmland than that according to ‘just the numbers.’ One factor propping up the farmland prices and rental rates is the presence of out-of-state bidders on in-state farmland. I have seen several sales where investors from outside the state — California, as one example — have ‘like-kind exchange’ money that they need to spend within an IRS-prescribed timeframe, so they are willing to pay more for farmland than local farmers who actually know the true value of the farmland.”

“I think the most interesting part of farm economics in the next two to three years is going to be watching commodity prices and seeing where farmland and rental values track vis-à-vis these prices. I don’t know which “incentives” will drive the discussion, but it appears to be something different than just a simple supply and demand relationship.”

From Net Nebraska. “In winter, farmers across the U.S. visit their banks to learn whether they have credit for the next growing season, relying on that borrowed money to buy seed, fertilizer and chemicals. But prices for corn, soybeans and wheat are low enough that some producers have had a hard time turning a profit, and financial analysts expect some farmers will hear bad news: Their credit has run out.”

“That’s what happened to the Delaneys, a family now trying to save their farm near Fremont, in eastern Nebraska. Several years ago, when crop prices surged, the family gathered in this office and planned to grow the farm. ‘More acres, more income. That’s the old philosophy,’ said Tom Delaney, who runs the farm with his son, Tim, and daughter-in-law, Jody. They built it up to 2,500 acres — more land than most farms in the area — but when grain prices fell it was more than they could afford.”

“Nearly two years ago, Delaney says two lenders from their bank, Farm Credit Services, told them their farm was in a financial tailspin. The lenders ‘basically said we’re not going to back you up anymore and you need to sell out,’ Delaney said. The family couldn’t cut costs enough to convince the bank that they could pay back their $1.8 million debt.”

“The U.S. Department of Agriculture estimates about 12 percent of crop farms are highly leveraged — including new farms that haven’t built up assets or farms that grew too fast, like the Delaneys. That level of debt makes farms vulnerable as banks tighten producers’ credit.”

“The Delaneys have downsized to about 500 acres, switched to growing non-GMO crops (which bring in more money than traditional crops) and revamped their farm since losing their loan. There’s now a hog pen, where pink and red Berkshire hogs root around the dirt and make a clatter as they lift and drop the flaps on their feeder bins. These animals are another part of the Delaneys’ rebuild, with a plan to raise about 2,000 hogs a year for Heritage Foods, which supplies upscale grocer Whole Foods.”

“Tom Delaney shrugs and reaches into the pen to pat a pig on the back. ‘If that’s what it takes to pay the bills it’s what we’re gonna do,’ he says. The farm is still in debt and the bank could foreclose on it, but it is earning a profit again. The Delaneys say this is their chance to save the family farm — if they can find a bank that feels the same way.”

From Farms.com. “A mega-home being constructed on protected farmland in British Columbia has driven the price of the property up by an astronomical amount. The seven-bedroom nine-bathroom mansion on No. 2 Rd. in Richmond, B.C. is worth $765,000, according to BC Assessment, a Crown corporation that classifies and values property in the province. Last year, the 26.6 acres of land was valued at $88,336. With the addition of the home, the value of the land jumped by 9,245 per cent to $8,255,000.”

“The home will fall within the boundaries of the Agricultural Land Reserve (ALR), which contains 4.6 million acres of provincially owned farmland. Residents like Laura Gillanders are concerned that not only will the property value continue to rise after the home is complete but also that the land prices will disable farmers from being able to produce crops.”

“‘By next July that home could be worth millions more,’ Gillanders told Farms.com. ‘But the real story here is that the land went from being farmed to not being farmed. And the value shows that this is a non-farm house. If it was a farmhouse being built to maintain the farm, they would still be farming. The income is clearly not generated from agriculture.’”

“Large developments on ALR land in the Richmond area are becoming common. In February, a speculator purchased a four-acre blueberry farm with about $80,000 in annual crop revenue and with farm status (meaning the owner only pays municipal taxes), for $2 million. The individual received a permit to build a 12,000 square-foot home. From there, the value of land kept rising.”

“‘They re-listed it for $2.77 million with an advertisement saying the owner could have a huge backyard, private driving range, a 24-seat theatre and that it was all permitted on ALR land,’ Gillanders said. ‘The land was relisted in the fall for $4.5 million. Now a foreign investor is flipping the land for $7.7 million and the house isn’t even built yet.’”