Farmland prices stay up as crop prices fall

Farmland, it turns out, is sticky.

It’s sticky not in the reach-down-and-touch-the-dirt kind of way, but in the way economists use the word.

And because it’s sticky, because farmers really like to own land, prices for Kansas crop land have remained strong this fall, even as the land’s ability to generate income is falling along with crop prices.

Farmland prices in Kansas rose an average of 17.1 percent per acre in 2014, compared to a year ago – nearly the highest increase of any state in the country, according to the U.S. Department of Agriculture.

Kansas crop and pasture land, in the USDA report, in 2014 averaged $2,000 an acre, twice what it cost in 2010.

The increase in farm land prices so alarmed former Kansas City Federal Reserve Bank President Thomas Hoenig that he issued several public warnings of a rising real estate bubble. He was worried about a repeat of a painful farm collapse akin to the early 1980s.

The USDA report was released in August amid a steep drop in the price of corn, milo, soybeans and wheat.

Since the price of farm ground is generally based on its ability to produce revenue, everybody involved in the buying, selling and lending on farm ground is watching sales and auctions very, very closely.

“It’s definitely in the conversation now,” said John Rupp, a broker for J.P. Weigand who specializes in land.

At this point, said Rupp and several other experts, overall prices really haven’t fallen, although there are some hints that the market is softening.

Rupp said he recently sold some irrigated land for $4,450 per acre. There were plenty of people at the auction.

“We thought that would serve as a snapshot of what’s happening, with corn prices what they are,” he said, “But the sale performed and local farmers are still showing strong interest.”

Crop land vs. pasture land

Brock Thurman, vice president of Farmers National based, a farmland real estate company, said the decline in grain prices is leading to a differentiation in the market.

Top quality farm ground may even be gaining value and good quality ground is staying solid, he said.

But the marginal stuff is drawing less interest.

“Land that is poor quality, such as if it’s sandy soil, or if it’s in western Kansas and has some water issues, that market has softened dramatically,” he said.

Another big differentiation, he said, is that the outlook for pasture land, where cattle graze, remains strong.

The price for cattle continues to move in record territory, and more ranchers are holding back heifers to restock herds. As a consequence, he said, the price of pasture land remains very strong.

Rupp said he sees interest among out-of-state ranchers in Kansas pastureland. After suffering through a three-year drought in Texas, they’re interested in diversification.

The romance of farmland

The great majority of bidders for farmland in Kansas are nearby farmers. That’s the way it’s been for decades, say brokers.

And these days, most farmers have had a terrific few years of profitiability, despite the drought. Generally, they’re flush with cash.

And, while crop prices may be down this year, crop farmers may not have taken a disasterous hit, yet. They have crop insurance, price hedging and can sell their products at any number of points, as required by their own financial needs and thinking.

And when it to comes to income-producing assets, farmland really is different, said Greg Reno, regional vice president of American AgCredit, part of the nationwide Farm Credit System.

Farmland is a finite resource – the land across the road might only come up for sale once in a lifetime – he said. Farmers see farming as a long-term endeavor. They know it goes up and down. One down year likely isn’t enough to change their attitudes.

“There is a tremendous amount of cash looking for a home right now, and people find comfort in owning land, as opposed to owning stocks,” Reno said. “They see true long-term value in ag land.”

If interest rates were to rise significantly, he said, that would create more interest in alternatives, such as certificates of deposit and bonds, he said.

“We’ve turned off the jet fuel, but there is still pressure upward for real estate. The alternatives aren’t that great, and it’s still viewed as an asset class with some romance.”

Not the ’80s

Nathan Kauffman, an economist and vice president of the Kansas City Federal Reserve Bank, agreed with the others that land prices haven’t fallen even as the income that supports those prices has — and he said he’s keeping an eye on it.

It takes time for the cycle to turn, he said. Some factors, particularly low interest rates, buoy those prices people will pay for land, even as some factors are turning negative.

The good news is that farmers haven’t taken on a lot of debt to buy their land – or used their land as collateral to expand or to finance their operations, he said. That is what drove the farm crisis of the early 1980s, when prices collapsed, taking farmers with them. He is watching to see whether this year’s more difficult income situation leads to taking on more debt.

“It doesn’t look bad at this point,” he said, “becaue so many farmers have been improving their balance sheets and their working capital. They still look relatively good.”

This story was originally published October 10, 2014 at 5:22 PM with the headline "Farmland prices stay up as crop prices fall."