Factors Affecting Farmland Markets
The Changing Landscape of Ag Banking in Illinois
IBA Ag Banking Conference
Sept. 7-8, 2006 – Springfield Illinois
Bruce J. Sherrick
University of Illinois
visit us at: http://www.farmdoc.uiuc.edu/
Outline:
•
•
•
•
Background, Ag B/S and Lender Shares
Valuation and Income info – how linked?
Investment performance of farmland
Illinois land market updated survey
information: who, why, what and how…
• Contemporary issues for farmland markets
U.S. Ag Sector Balance Sheet summary
US Totals, source USDA
Farm assets
Real estate
Non real estate
1970
278,864
202,417
76,447
1980
983,305
782,819
200,486
($millions)
1990
840,609
619,149
221,459
Farm debt
Real estate
Nonreal estate
48,753
27,506
21,247
166,824
89,692
77,131
230,112
816,481
Equity
Selected Ratios:
Debt/equity
Debt/assets
Real estate value/equity
Real estate value/assets
Real estate debt to D
21.2%
17.5%
88.0%
72.6%
56.4%
20.4%
17.0%
95.9%
79.6%
53.8%
2000
1,203,215
946,428
256,787
2006f
1,671,637
1,395,800
275,837
137,962
74,732
63,230
177,637
91,109
86,529
218,717
122,929
95,788
702,647
1,025,578
1,452,920
19.6%
16.4%
88.1%
73.7%
54.2%
17.3%
14.8%
92.3%
78.7%
51.3%
15.1%
13.1%
96.1%
83.5%
56.2%
Ag Sector Balance Sheet - keys
• Farmland represents 83.5% of farm assets and
about 56% of farm debt (8/2006)
• Low aggregate leverage relative to other
sectors (currently approx. 13.1% ag. D/A and
shrinking slowly)
• Some shifting among debt providers, little shift
between debt and equity
• Active equity market absence
Debt shares by Lender through time
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Farm Credit System
Farm Service Agency
Commercial banks
Life insurance co.
Year
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
Individuals and others
1960
market share
Ag Real Estate Debt Shares
Debt shares by Lender through time
Ag Non Real Estate Debt Shares
60.0%
40.0%
Farm Credit System
Farm Service Agency
30.0%
Commercial banks
20.0%
Individuals and others
10.0%
Year
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
0.0%
1960
market share
50.0%
History repeated… again
“We have two great sources of profit in farming: first, rise in
the value of the land; and second, profit on the production
of farm crops. The first has been the chief source.”
- George Morrow, 1886
“Illinois farmland will only experience about 4-5% average
appreciation in 2005”
“I was wrong. Again.”
-Bruce Sherrick, 2004
-Bruce Sherrick, 2004, 2005, 2006, etc.
Illinois Farmland Markets…
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
year
2004
2000
1996
1992
1988
1984
1980
1976
1972
cont. compounded increase of 5.7% per year 1970-2006
1968
price ($/acre)
Ave. Farmland Prices - Illinois
source:USDA
Capital Gains Rates and Values
$2,000
-10%
2004
0%
2000
$2,500
1996
10%
1992
$3,000
1988
20%
1984
$3,500
1980
30%
1976
$4,000
1972
40%
1968
Capital gain (%/year)
Farmland Values and Capital Gain Rates
$1,500
-20%
$1,000
-30%
$500
-40%
$0
Year
Capital Gain Rate
Ave. Farmland Prices - Illinois
Components of return to Farmland
Capital Gain Rate
Current Income
Total Return - Illinois
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Factors affecting farmland values
• Thin Markets – highly inelastic local demand
• Performance relative to other investments
• Composition of returns changing (farming, vs.
recreation, development and 1031 influence)
• Recent income levels, interest rates
• Changing lease markets, absentee ownership
Farmland Turnover -- Illinois
• Thin – average of under 1% annual sales, arm’s
length, available competitively, actual farmland
intended usage
– limited option to expand with contiguous/proximate
land through purchase
– increases importance of lease markets in value
determination
– “lumpy” land sales relative to leasing
…leads to some exceptional localized events and
difficulty in assessing “average” value
History of Farmland Returns as Investment
• Long progression of capital gains, one period of losses –
data period important when assessing performance
• Capital Gains Rates (annual geometric):
–
–
–
–
–
–
1950-2000: 5.6%
1970-2000: 5.7%
1980-2000: 2.0%
1970-2006 Q2: 5.7% (est.)
2004-2005 Illinois average increase 28% (USDA)
2005-2006 Illinois forecast increase 15% (USDA)
• Plus: current income in 3-5% range from rent/operations
Farmland as an investment
• Academic research shows:
– Low systematic risk – behaves much like a fixed
income financial asset
– High or adequate returns given risk
counter to premise of many debates on “low returns”
– Role as inflation hedge (positive correlation)
– Market friction caveats, explanations
• Portfolio models favor inclusion of farmland in
investment portfolios – to greater degree than
observed in reality
Correlation with other financial assets’ returns
Correlations with Illinois Farmland Returns, 1970-2005
Aaa
S&P500
EAFE
All REITS
TBsm3m
CPI
PPI
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Returns and volatility, 1970-2005
12%
Ave. Annual Return
10%
8%
Illinois
Baa
EAFE
T-10y
ED3M
SLbond
Hybrid REITS
EUROPE
NYSEJones
Dow
Mortgage REITS
6%
BBALibor
CPI
4%
2%
0% 0
0%
5%
10%
15%
St.Dev. of Returns
20%
25%
30%
Relatively smooth returns series
Anual Return
0.80
0.60
0.40
Return
0.20
0.00
-0.20
-0.40
-0.60
-0.80
-1.00
1970
1974
1978
1982
1986
1990
1994
1998
2002
Year
Illinois
EAFE
Hybrid REITS
PPI
S&P500
BBALibor
CPI
Aaa
ED3M
TBsm3m
Equity REITS
All REITS
Mortgage REITS
… and fairly attractive levels
Average Holding Period Rate of Return - held until present
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-40.0%
1970
Ave Return - held until 2004
40.0%
Date Purchased
Illinois
PPI
CPI
TBsm3m
All REITS
EAFE
S&P500
So what drives the Farmland market?
• Within Illinois, considerable risk
differences, esp. North to South
• Risk-adjustment within class?
– cash rent series by county (FBFM)
– cash gross returns by county (farmdoc)
– test fraction of expected return paid in form of
cash rent
• Strong evidence of within-class response
Farmland as an investment
• Traditional Capitalization arguments: considerable
difference in rent and productivity lead to…..
Jo Daviess
0.63
StephensonWinnebagoBoone McHenry
0.68
0.57
0.61
0.57
Carroll
0.78
Illinois
Ogle
0.76
Whiteside
0.70
Rock Island
0.72
Henry
0.76
Mercer
0.77
HendersonWarren
0.79
0.85
Hancock McDonough
0.75
0.54
Knox
0.79
Lee
0.73
Bureau
0.83
Putnam
Stark
0.80
Marshall
0.81
0.73
De Kalb
0.84
Kane
0.77 Du Page
Cook
0.48 0.25
Kendall
0.63
La Salle
0.78
Grundy
0.67
Illinois Economic Productivity Index
0.00 to 0.13
0.13 to 0.25
0.25 to 0.43
0.43 to 0.57
0.57 to 0.69
0.69 to 0.78
0.78 to 0.83
0.83 to 0.90
Illinois
102
105
109
Lake
119
107
134
Cook
Du Page
125
130
129
110
110
123
134
128
Kankakee
0.54
126
Putnam
111
129
139
130
Ford
0.60
140
Iroquois
0.63
141
126
121
137
140
122
Jackson Williamson Saline Gallatin
0.15
0.17
0.39
0.09
Johnson
0.11 Pope
0.05
Pulaski Massac
Alexander
0.13
0.11 0.16
126
133
127
Hardin
0.09
136
135
117
Logan
0.85
Union
0.17
117
130
133
De Witt
Champaign Vermilion
0.84 Piatt
0.69
0.82
Menard
Adams
0.89
0.81
0.41
Macon
0.87
Douglas
Sangamon
Morgan
0.80
Edgar
0.88
Scott
Pike
Moultrie
0.77
Christian
0.65 0.86
0.49
0.87
Coles
0.85
0.78
Shelby
0.62
Greene
Clark
Macoupin Montgomery
Cumberland 0.51
0.62
0.60
0.54
0.48
CalhounJersey
Effingham
0.42 0.52
Jasper Crawford
Fayette
0.27
0.31
0.35
0.14
Bond
Madison
0.14
Clay Richland Lawrence
0.31
0.08
Marion
0.15
0.26
Clinton
0.09
0.17
Saint Clair
Wayne Edwards
Wabash
Washington
0.35
0.10
0.36
0.30
Monroe
Jefferson
0.12
0.25
0.06
Perry
Hamilton White
Randolph
0.09 Franklin
0.12
0.24
0.13
0.07
Schuyler
0.43
Cass
Brown
0.74
0.40
101
Will
0.47
Livingston
0.62
Peoria Woodford
0.80
0.72
Tazewell
McLean
0.83
0.83
Fulton
0.56
Mason
0.56
Lake
0.16
105
109
108
129
141
122
137
123
121
136
139
112
134
134
127 137
127
140
142
127
103
Calhoun
103
108
76
88
52
90
93
93
108
Jersey
72
68
64
69
67
86
78
71
65
70
65
62
90
60
Perry
60
68
74
61
60
67
54
57
Alexander55
94
Pope Hardin
41
60
Rent per acre
0 to 20
20 to 40
40 to 60
60 to 80
80 to 100
100 to 120
120 to 140
140 to 160
Farmland as an investment
• Nothing much in aggregate….
Swamped by other effects
So, U of I Study of factors influencing
farmland values finds following
significant items (Huang, Sherrick, Miller,
Gomez, 2006)
•Size of tract (-)
2014
2163
2783
1916
Illinois
Cook
Du Page
2625
3738
2199
3898
2308
2138
3384
2955
1820
Putnam
2753
2566
2428
1806
1492
2094
2342
2935
2523
2257
2281
2577
1691
1467
2884
1311
1672
1362
1085
2693
2557
2382
1405
3083
2188
2964
2787
2654
3124
16942189
2174
2789
2676
2274
1884
Calhoun
1430
1946
1577
1814
Jersey
•Distance to metro location (++)
Lake
4289
3718
2098
1251
•Distance to Chicago (++)
3865
2737
1107
•SPR (+++)
3313
1820
1088
3151
1425
1384
1187
1526
1080
1052
1294
1243
1649
•Ruralness indicators (--)
2557
858
1563
2147
1120
Perry
•CPI (++)
•Population (+)
•Income (+)
•Livestock activities (+/-)
1308
1046 1534
927
1177
1227
1407
1653
Alexander931
1407
1276
1111
1263
Pope Hardin
1588
Price per acre
0 to 600
600 to 1200
1200 to 1800
1800 to 2400
2400 to 3000
3000 to 3600
3600 to 4200
4200 to 4800
Land Market Information –
ISPFMRA annual survey
ISPFMRA
2005-2006 Land Value Trends
Prime
Farmland
Good
Farmland
Average
Farmland
Recreational
Land
Northern Region
(1 & 2)
+12%
+13%
+18%
+25%
Central Region
(3, 4, 5, 6, & 7)
+8%
+5%
+9%
+16%
Southern Region
(8, 9, & 10)
N/A
+9%
+13%
+13%
Area
ISPFMRA 2006 -- Survey says…
Change in rate of Ave Cash Rent
Ave. Cash
Per
Acre
Region 1 % Change in land turnover (up,
rent/acre on
Northeastern Illinois Total Value Per $/acre from prior steady,down) and (Typical of all
% Change
recently
leases in region) from prior year negotiated
Farm Classification Acre (Typical)
year
%
7000
8%
Up 10%
170
0%
175
Good Productivity
6000
9%
Up 10%
155
3%
150
Average Productivity
4500
18%
Up 10%
135
0%
130
Transitional Tracts
18000
12%
Steady
Transitional to Active
Development
50000
11%
Up 10%
ISPFMRA 2006 -- Survey says…
Region 6 - Central
IllinoisFarm
Classification
Excellent
Productivity
Total Value Per
Acre (Typical)
Ave Cash Rent
Per Acre
% Change in $/acre (Typical of all
leases in region)
from prior year
% Change
from prior
year
Ave. Cash
rent/acre on
recently
negotiated
$4,500 - $5,000
Up 7%
180
0
180
Good Productivity
$3,200 - $4,000
Up 7%
166
0
170
Average Productivity
$2,000 - $3,000
Up 7%
120
0
120
Transitional Tracts
$8,000 - $16,000
Up 7%
N/A
ISPFMRA 2006 -- Survey says…
Region 10 - Southern
Illinois Farm
Classification
Change in rate of Ave Cash Rent
Per Acre
land turnover
Total Value Per Acre % Change in $/acre (up, steady,down) (Typical of all
leases in region)
(Typical)
from prior year
and %
Good Productivity
3425
up 10%
steady
120-150
Average Productivity
1669
up 14%
steady
70-90
Recreational Land
1615
up 14%
up 5%
n/a
Estate sales prevail ..
Sellers of Farmland, Illinois, 2005.
Active farmers
11
Retired farmers
22
Estate sales
43
6
Institutions
17
Individuals
1
Others
0
10
20
30
Percent
40
50
Estate settlement leads motivations..
Reasons for Selling Farmland, Illinois, 2005.
Settle estate
42
Need cash
7
Forced liquidation
4
Received a good price
37
Re-orient investment
4
5
Close-out undivided interest
Other
1
0
10
20
30
Percent
40
50
Investors remain main buyers..
Type of Farmland Buyers, Illinois, 2005.
31
Local farmers
Relocating farmers
10
36
Non-local investors
Local investors
10
Institutions
1
Recreational buyers
10
Other
2
0
10
20
Percent
30
40
Attributes of buyers include …
• 56% of buyers used 1031 exchange funds - 2005
– up from 48% year prior, down first half of 2006.
• 62% of buyers did not use debt capital
– increase of 10% from year prior
§1031 Buyers driving market up..
Reasons for 2005 Farmland Price Increase, Illinois.
Other
0.1
Government support programs
1.1
High corn and soybean yields
1.6
Large number of non-1031 buyers
2.6
Low interest rates
3.6
Limited supply of farmland
4.1
Large number of 1031 buyers
7.9
0
2
4
6
Score
8
10
Chicago impacts dominate..
Location of 1031 Buyers, Illinois, 2005.
Chicago Area
57%
St Louis
7%
Other Illinois
Area
6%
Outside
Illinois
6%
Local Area
24%
Price Increase Expected in 2006
Expected Change in Farmland Price During 2006, Illinois.
Increase more than 10%
2
Increase between 6 and 10%
15
Increase between 0 and 5%
61
17
Decrease between 0 and 5%
4
Decrease between 6 and 10%
1
Decrease more than 10%
0
10
20
30
40
50
Percent of Respondents
60
70
Stable Trend expected for 2007
Expected Change in Farmland Price During 2007, Illinois.
Increase more than 10%
2
Increase between 6 and 10%
4
Increase between 0 and 5%
61
Decrease between 0 and 5%
31
Decrease between 6 and 10%
Decrease more than 10%
2
0
0
10
20
30
40
50
Percent of Respondents
60
70
Cash rent and custom farming
returns thought to be higher..
Table 1. Per Acre Farm Incomes that Landlords Receive
for Different Lease Types and Land Qualities, 2005.
Lease type
Excellent
Land Quality
Good
Average
Fair
Traditional crop share
------------------ $ per acre --------------------120
110
95
78
Cash rent
150
135
120
103
Custom farming
160
145
130
100
Cash Rent variability by quality..
Table 2. Per Acre Cash Rents for Top 1/3, Mid 1/3, and Low 1/3
Cash Rent Leases by Land Quality, 2005.
Lease type
Excellent
Land Quality
Good
Average
Fair
High 1/3
----------------- $ per acre ---------------------190
175
150
125
Mid 1/3
170
150
130
110
Low 1/3
150
130
110
90
Cash rent leases still most prevalent
Types of Leases in 2006.
1
Other
6
Custom farming
45
Cash rent
Modified crop share (other than supplemental
rent)
5
7
Modified crop share with supplemental rent
36
Traditional crop share
0
10
20
30
Percent
40
50
Growth expected in fraction
of cash rent leases..
Types of Leases Projected in 2006 and 2010.
Other
Year
2006
2010
Custom farming
Cash rent
Modified crop share (other than
supplemental rent)
Modified crop share with supplemental rent
Traditional crop share
0
10
20
30
40
Percent
50
60
70
Contemporary Issues:
% farm income from government direct payments
•
•
•
•
•
60%
50%
Share
• Role of government
(payments average 24% of
income, 32% pre-,
regulation, and changing
program design and
emphasis)
70%
40%
30%
20%
10%
0%
1970
1975
1980
1985
1990
Year
Energy Bill or Farm Bill? Food v. Farm programs?
Property Tax Updates
Term Structure impacts
What’s on the “Horizon” with competition
Basel II and other badly kept secrets
1995
2000
2005
Questions/Comments?
visit farmdoc on the web at: http://www.farmdoc.uiuc.edu/
Thanks!