2013 Fresno Agricultural
Valuation Symposium: Bubble or
Just the Beginning?
The Economics of Farm Real Estate Value: A
New Reality?
Dr. Mechel S. Paggi
Director, Center for Agricultural Business
Wednesday, January 23, 2013
Are Higher Land Values A Bubble?
— Why are We Having this Discussion
— Fundamentals in Determining Agricultural Land
Values
— What Does the Future Look Like For Market
Fundamentals
— What Does it Imply for Land Values
Why are We Having this Discussion ?
US Farm Real Estate Values
Have Been Steadily Increasing
Dollars per acre
2500
Change 1970-1980
current $ ... +276%
inflation adj. ... 77%
Change 1980-1990
Change 1990-2000
current $ ......
-7% current $.....
+60%
inflation adj. ... -42% inflation adj. ... 21%
Change 2000-2010
current $ ...
+102%
inflation adj...+ 59%
2000
Even When Adjusted
For Inflation
1500
Farm Real Estate
(current dollars)
1000
Farm Real Estate
(inflation adjusted*)
500
10
12
06
08
02
04
98
00
94
96
90
92
86
88
82
84
78
80
74
76
70
72
0
*Inflation adjustor: price index for Gross Domestic product (2005=100); source: Dept. of Commerce, BEA
With A Diverse Regional Profile
U.S. average increase 2002 to 2012 = 123%
WA
54%
OR
52%
MT
70%
ID
60%
WY
41%
NV
CA
71%
UT
-7
AZ
52%
Change from 2002-2012
less than 60%
60% to 120%
120% to 180%
Over 180%
VT
ND
200%
SD
271%
MN
183%
NE
273%
CO
45%
NM
27%
KS
158%
OK
116%
TX
94%
IA
258%
WI
112%
MI
86%
NH
ME
NY
97%
PA
69%
OH
IL
IN
90%
181% 154%
WV
VA
82%
MO
84%
126%
KY 73%
NC 46%
TN 51%
AR
SC
101%
58%
AL
GA
MS
44% 71%
88%
LA
78%
FL
54%
MA
RI
CT
NJ 37%
DE
123%
MD
80%
California Cash Rent
Reflects Land Value Pattern
Is this Trend Sustainable?
Fundamentals in Determining
Agricultural Land Values
Farm Income & Interest Rates Basis
— Fundamental Economic Measure: Price-to-Value
Capitalized Value = Cash Rent / discount factor
(measure of cash flow)
(appropriate interest rate)
Price-to-Value = Land Value / Capitalized Value
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
California By The Numbers
USDA,NASS, 9.14.12
California Example
Irrigated Cropland - 2012
Avg. Cash Rent: $350
Discount Rate: 3.2%*
Avg. Capitalized Value: $350/3.2% = $10,937
Avg. Value Reported = $12,000
Price-to-Value Ratio: $12/$11 = 1.09
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
* 10 Year Treasury Note
Fresno County Example
Irrigated Cropland - 2012
Cash Rent: $300**
Discount Rate: 3.2%*
Avg. Capitalized Value: $300/3.2% = $9,375
Value Reported (Exchange Contractors) = $9,000**
Price-to-Value Ratio: .96
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
* 10 Year Treasury Note; ** High End 2012 Trends in Agricultural Land & Lease Values
Fresno County Example
Tree Fruit - 2012
Avg. Cash Rent: $400
Discount Rate: 3.2%*
Avg. Capitalized Value: $400/3.2% = $12,500
Avg. Value Reported = $9,000 - $14,000
Price-to-Value Ratio: 0.72 - 1.12
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
* 10 Year Treasury Note
Fresno County Example
Almonds - 2012
Avg. Net Return Above Total Costs: $480*
Discount Rate: 3.2%**
Avg. Capitalized Value: $480/3.2% = $15,000
Avg. Value Reported = $12,000 - $18,000
Price-to-Value Ratio: 0.84 - 1.16
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
Based on $1.99 per pound & 2200 lb/ac TC = $3,897 ** 10 Year Treasury Note
Interest Rate Influence
California Example
Irrigated Cropland - 2012
Avg. Cash Rent: $350
Discount Rate: 5.0%*
Avg. Capitalized Value: $350/5.0% = $7,000
Avg. Value Reported = $12,000
Price-to-Value Ratio: $12/$7 = 1.71
When Price-t0-Value Ratio > 1.0 Value is not
Supported by Farming Income Stream
* 10 Year Treasury Note
Path of Development Effect
Additional Consideration
What Does the Future
Look Like For Market
Fundamentals?
We did not Go Off the Cliff
But Where are we Going?
Overall Future Looks Encouraging
For Agriculture
Farm Income
FAPRI Baseline 2012
Interest Rates (Discount Rate)
FAPRI Baseline 2012
Interest Rates (Discount Rate)
Percen t
9
8
10-year Treasuries
7
6
5
4
3
2
Federal
Funds Rate
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Interest Rates (Discount Rate)
Central Valley Commodity Prices
Prices received index (1990-92=100)
225
200
175
150
125
100
75
All cr ops
1992
1994
1996
Fr uit & Nuts
1998
2000
Com m er cial vegetables
2002
2004
2006
2008
Alfalfa
2010
2012
Change 2007 to 2012
All crops ........................
+63%
Fruit & Nuts ...................
+10%
Commercial Vegetables ..
+9%
Potatoes & dry beans .....
+34%
Cotton ............................
+60%
Feed & Oilseeds ..............
+88%
Alfalfa hay ……………………
+55%
Livestock and dairy .........
+19%
Specialty Crop Price Index
Summary
Future of Land Values
— Different Situation from 1980’s or housing bubble
— Purchases from strong financial positions, not debt on
top of debt; significant equity (cash and collateral)
— Income producing asset with fixed supply; no risk of
over-building/over development like housing and
commercial real estate
Summary
Future of Land Values
— Commodity Prices (Long Run Food Demand)
— Interest Rates (Need to Stimulate Economy)
— Path of Development Influences (Recovery in sight?)
But the Future is Uncertain
For Now Signals Suggest a Plateau or Bumpy Ride Up
Not a Bursting
Bubble
Thank You For Your Attention
Copy of Presentation
And Contact
www.csufcab.com