Falling land prices entice investors

Rural economics follow farm fortunes

Farmland Partners Inc. recently acquired eight row-crop farms in North Carolina, South Carolina, and Virginia comprising an aggregate of 15,042 acres. The purchase was $49.8 million in cash and an aggregate of almost 3 million shares of common stock and units of limited partnership interest in the Farmland Partners operating partnership.

According to a release, the company entered into a five-year lease agreement with the seller for all eight farms with an initial annual cash rent of approximately $4.3 million, including for the 2015 crop year.

A company statement said that Farmland Partners seeks to acquire high-quality primary row-crop farmland located in agricultural markets throughout North America. The company’s portfolio consists of about 115 farms and close to 70,000 acres in Illinois, Nebraska, Colorado, Arkansas, Louisiana, Mississippi, South Carolina, North Carolina, South Carolina and Virginia.
Earlier this year, Farmland Partners announced it had purchased three row crop farms in Nebraska and Colorado. Those farms total 2,592 acres and were purchased for $16.6 million in cash, 63,581 shares of common stock and $2.7 million in units of limited partnership interest in Farmland Partners Operating Partnership.

Investment-class land purchases aren’t new, but some buyers are looking at softening land prices as an opportunity. Ernie Goss, economist at Creighton University’s Heider College of Business, said recently, “Even though crop prices have stabilized, demand for farmland remains weak, pulling agricultural land prices down by an estimated annualized rate of 6 to 8 percent.”

For farmers hoping to expand as local land opportunities arise, the price correction can be welcome relief. At the same time, those who need land-based collateral have had sinking fortunes. With several years of good prices, cash positions are strong for some farmers. Goss pointed out that even though farm income has weakened recently, more than one-fifth of farmland sales are for cash, according to a banker survey in February. That number has held steady since last year.

March survey results at a glance
Goss heads up the Rural Mainstreet Index, a composite monthly survey focused on indicators in the rural Midwest and Great Plains. Survey respondents consist of community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of a 10-state area. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

The survey represents approximately 200 rural communities with an average population of 1,300. It gives a real-time analysis of the rural economy. A snapshot of the most recent survey:

• The Rural Mainstreet Index remained below growth neutral for March, falling to its lowest level in five years.
• Farmland prices sank for the 16th straight month.
• Agriculture equipment sales declined to a record low level.
• Almost one-third of bankers say the Federal Reserve should not raise interest rates in 2015.
• Only 7.2 percent of ethanol plants have reduced production due to lower energy prices.

Overall: The Rural Mainstreet Index, which ranges between 0 and 100, sank to 43.6, its lowest level since February 2010, and was down from last month’s 46.4. A score of 50 means no change. Below 50 is contraction.

“The stronger U.S. dollar is undermining the farm and energy sectors by weakening agricultural exports, crop prices, livestock prices and energy prices. Mainstreet businesses dependent on export, agriculture or energy are experiencing pullbacks in economic activity,” said Goss.

Farming and ranching: The farmland and ranchland price index for March was unchanged from February’s weak 39.4. “Even though crop prices have stabilized, demand for farmland remains weak, pulling agricultural land prices down again. This is the 16th straight month the index has moved below growth-neutral,” said Goss.

Despite the weakness in farm income, nonfarm investors continue to purchase farmland with the share of outsiders buying farmland rising from 14.4 percent last June, to 17.5 percent in March.
The March farm-equipment sales index plunged to a record low of 15.2 and down from February’s already fragile 19.5. The index has been below growth neutral for 20 straight months. “With farm income expected to decline for a second straight year, farmers have become very cautious regarding the purchase of agricultural equipment,” said Goss.

Banking: The March loan volume index soared to 64.9 from 46.4 in February. The checking-deposit index dipped to 56.4 from February’s 57.3, while the index for certificates of deposit and other savings instruments advanced to 44.7 from February’s 41.5.

Almost one-third of bankers, or 29.8 percent, say the Federal Reserve should not raise interest rates in 2015. On the other hand, 10.6 percent indicate that interest rates should be increased immediately, while the remaining share of bankers say the Fed should increase interest rates in the second, third or fourth quarter of 2014.

Hiring: Despite weaker crop prices and pullbacks from businesses with close ties to agriculture and energy, mainstreet businesses continue to add workers to their payrolls. The March hiring index declined to 52.2 from February’s 56.5. “We have yet to measure any significant decline in employment for the energy sector in the region and for businesses linked to agriculture. I expect that to change in the months ahead as lower energy and agriculture prices work their way through the economy,” said Goss.

This month Creighton’s survey group asked bank CEO’s if ethanol plants had altered production due to lower energy prices. Of the bankers with ethanol production in their area, 85.7 percent indicated no change, while 7.1 percent reported increased production and 7.2 percent reported a reduction in ethanol production.

Confidence: The confidence index, which reflects expectations for the economy six months out, expanded to 47.8 from February’s 41.5. “The negative trend in farmland prices, agricultural equipment sales, and oil prices have negatively affected the outlook of rural mainstreet bank CEOs,” reported Goss.