Midwest Farmland Values: Past Peak Season?

Midwest Farmland Values: Past Peak Season?

Regional Fed Banks Report Declining or Slowing Growth in Prices


Nov. 15, 2013 4:46 p.m. ET

A multiyear run-up in the value of farmland in the U.S. Midwest may be running out of steam. Average cropland prices declined in parts of the Farm Belt in the third quarter from the previous quarter while rising at a low rate in other areas, according to separate reports this past week by regional Federal Reserve banks in Chicago, St. Louis and Kansas City.The surveys also found that some agricultural bankers expect cropland prices to decline across the Farm Belt as 2014 approaches because big harvests this fall have driven grain and soybean prices sharply lower. Corn prices also are expected to weaken after the U.S. Environmental Protection Agency on Friday proposed for the first time lowering an annual requirement for how much ethanol should be blended into gasoline.

“It’s likely that land values have peaked,” said Sam Miller, head of agriculture banking for Chicago-based BMO Harris Bank.

Farmland values fell 6% in the third quarter from the second quarter in the St. Louis Fed district, which includes parts of the Midwest and Southeast, according to a report Friday. That was not the first such decline this year, but was greater than an earlier drop of 2.3% in that region in the first quarter from the prior quarter.

Meanwhile, the average price of cropland in states surveyed by the Kansas City and Chicago Fed banks edged about 1% higher in the third quarter from second-quarter levels, reports this past week showed.

In recent years, increased demand for corn and soybeans, coupled with poor weather, drove crop prices to record levels and catapulted land values higher, helping to spur demand for farm equipment, pickup trucks and other purchases by farmers. Farmland values surged so rapidly that some analysts raised concerns about a bubble.

This year, better growing conditions set the stage for what is expected to be a record corn crop and among the biggest soybean harvests in history. U.S. corn prices have fallen nearly 40% this year.

Shawn Smeins, a managing director with agricultural lender Rabobank, said farmland prices began leveling off in the past three months as the price of corn dropped and worries that interest rates could begin to pick up after a long period of cheap credit. Lower grain prices expected next year may encourage farmers to maintain larger financial cushions, he said.

“They’re not going to go out and be as aggressive on land purchases or equipment purchases,” Mr. Smeins said.

While more Midwestern bankers anticipate land prices to head lower, the U.S. farm economy has proven resilient in recent months despite earlier predictions that values would fall.

Year-over-year land-value comparisons, for example, continue to show gains. The price of irrigated land in the states surveyed by the Kansas City Fed, including Kansas, Nebraska and Missouri, climbed 22% in the third quarter of 2013 versus the same period a year ago. Farmland prices in the states surveyed by the St. Louis Fed in the third quarter were 9% higher than in the prior-year period.

Rising farmland prices have drawn notice from top U.S. central bankers, including St. Louis Fed President James Bullard, who said in a recent interview that “I do worry about” the rate of increase and what it could mean.

There are important differences, though, between the recent climb in cropland values and similar sharp rises in the early 1980s that led to a crisis when commodity prices fell, analysts say. More land deals are being done these days with cash or substantial down payments, and generally farmers aren’t taking on debt at high interest rates, said Jeff Swanhorst, chief credit officer for AgriBank in St. Paul, Minn.

Mr. Bullard said he doesn’t think the gains have become great enough that if there were a collapse it would threaten the broader financial stability of the nation’s financial system. Strong fundamentals in farming do go some way toward justifying farmland price gains, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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