investors + love = farmland

As an Iowa native and investor, it’s almost requisite that we follow farmland. About 60% of our farms are owner-operated and over 80% are individual or family organizations. We supply 7% of nation’s food supply with farms that make up over 90% of our land (second only to Nebraska); roughly one-third of the best US farmland is located here. While manufacturing is the largest sector of the Iowa economy, the majority of that is related to food processing and machinery -- estimates put the indirect role of agriculture here around 25% of our total economic output. Needless to say, farming in one way or another comprises a large portion of our economic activity and state wealth, not to mention the knock-on effects as incomes in that space move higher.

In the first quarter of the year, farmland was up 16% in the Midwest. At first glance, it appears these increases were justified, since cash rents also gained 16%. Because of this, the price-earnings ratio for farmland was unchanged – which is a good thing given it’s already in the 25-27 range depending on the state. In Iowa, farmland values gained 20% while cash rents grew slightly less at 16%.

Not surprisingly, these year-over-year increases were driven by higher agricultural prices – corn up 50%, soybeans 29%, while milk, hog, and cattle gained at least 20%. Input prices, meanwhile, were up less than 10%, leading to higher profit margins.

We would worry about rising farmland values if bank balance sheets looked stretched, but the average loan-to-deposit ratio was at its lowest level in nearly 15 years (a period over which farmland values are up substantially). In other words, banks have more money to lend; some three-quarters of regional banks have actually lent less than they would like to. The fact that loan demand has actually come down while prices rise bodes well should farm values reverse in sudden fashion. Leverage can be particularly painful on the downside.

So who’s buying? Bankers report that it’s increasingly farmers, rather than investors. It also seems that the number and acreage of farms sold were larger than a year ago. This jibes with our comment in the last post about farmland that farmers know (1) dirt and (2) CDs, or bank certificates of deposit. Given the profile of the incremental farmland buyer, we’re watching CD rates as a leading indicator for farmland values. Should banks begin to pay substantially higher rates on CDs, watch for land values to decline – absent a major change in commodity prices, of course.