Iowa Farmland Market Update: What s Ahead?

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1 Iowa Farmland Market Update: What s Ahead? Wendong Zhang Assistant Professor of Economics and Extension Economist wdzhang@iastate.edu Ag Credit School, June 14 th, 2017

2 The new Mike Duffy since Aug

3 Why Care About Farmland Market?

4 Guiding Framework - Ricardian Land Value = localized net income / universal interest rate

5 Ag Real Estate Value ($/acre) 9000 Nominal Corn Belt vs. U.S. Farmland Values ILLINOIS US Total INDIANA IOWA Source: USDA-NASS; Iowa Farmland Value Portal

6 Land Value ($ per acre) AVERAGE VALUES all farmland $7,183 As of Nov Iowa Nominal and Inflation-adjusted Farmland Values % Nominal value Inflation-adjusted value (2015 dollars)

7 Annual Percentage Change (%) % Change in Nominal Iowa Farmland Values % 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%

8 Inflation-adjusted Iowa Ag Real Estate Values Source: USDA-NASS; Ag Census, Iowa Farmland Value Portal

9 Farm Crises and this downturn Positives High income in pre-crisis golden eras Low interest rate environment Prudence among ag lenders and bank regulators Wider, stronger (?) govn t safety net Concerns Deteriorating farm income and ag credit High reliance on ag exports, US $ Uncertainty in farmland supply and turnover Looking Ahead

10 Positive 1: Real Income Accumulation Source: USDA-ERS, Ag DM C2-70 Zhang and Beek 2016

11 Positive 2: Historically low interest rates Source: 10-year-treasury-rate

12 Expect at least two interest rate hikes in 2017 What the Fed Reserve thinks the interest rate should be Source: Fed Reserve March 2017 dot plot

13 Positive 3: Prudence in Ag Lenders/Regulators Banking Regulations More stringent, frequent stress-test BASEL III, liquidity requirements for banks (Ron Hansen Iowa Division of Banking Superintendent) walk into this with eyes wide open Changes in Loan Practices (FCS, Iowa) Before 1987: loan to value ratio is 85% : loan to value ratio is 65% After 2008: use cash-flow method for collateral ($4 corn, $10 bean) and 50% of cash flow value Source: Jim Knuth, FCS

14 Cash Rent or Mortgage Payment ($/acre) 450 Annual Mortgage Payments vs. Cash Rents for Iowa Farmland Loan Cash Rent 20-yr PMT 30-yr PMT 15-yr PMT

15 Percent Ratio 30 Agricultural Financial Ratios for the US Debt/asset ratio Operating expense ratio Debt/equity ratio Debt service ratio

16 Positive 4: Stronger Govn t Safety Net Federal Crop Insurance Source: Chad Hart

17 Farmland market tends to be localized Local Land Value = local net income / universal interest rate

18 Land Values by District and Land Quality, Nov 2016 District Average Value % Change High Quality % Change Medium Quality % Change Low Quality % Change Northwest $9, % $10, % $8, % $6, % North Central $7, % $8, % $6, % $5, % Northeast $7, % $8, % $6, % $4, % West Central $7, % $8, % $6, % $4, % Central $7, % $9, % $7, % $5, % East Central $7, % $9, % $7, % $5, % Southwest $6, % $7, % $5, % $4, % South Central $4, % $5, % $4, % $2, % Southeast $6, % $9, % $6, % $3, % Iowa Avg. $7, % $8, % $6, % $4, %

19 Livestock and Crop Inventory by District Chickens, Layers Inventory 2012 Harvested Acres 2015 Hogs Milk Cows Cattle Corn Soybean Northwest 30% 26% 29% 22% 15% 16% North Central 64% 16% 4% 6% 14% 13% Northeast 1% 12% 51% 16% 12% 8% West Central 0% 13% 1% 13% 15% 16% Central 3% 13% 1% 7% 15% 14% East Central 1% 5% 10% 11% 10% 10% Southwest 0% 2% 0% 9% 7% 9% South Central 0% 2% 1% 9% 4% 5% Southeast 1% 11% 3% 6% 7% 8% State Inventory 20.4 million 20.4 million 0.17 million 2.34 million 13.2 million 9.8 million

20 Land Values by County, 2016

21 Percent Changes in Land Values from Nov 2015

22 ISU survey results echo other surveys

23 Federal Reserve Bank of Chicago, Kansas City Feb 2017 Ag Letter Realtor Land Institute March 2017 Iowa Survey +0.9% since Sept 16

24 ISU survey results echo other surveys Pasture value USDA June Area Survey, August 2016

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26 Factors Driving Past (and Future!) Land Value Changes

27 Major Positive Factors Affecting Iowa Farmland Market, Positive Factors, 2016 (Percent) 0 Favorable Interest Rates Strong Yields Land Availability (Limited Supply) Strong Demand (Many Buyers)

28 Major Negative Factors Affecting Iowa Farmland Market, Commodity Prices (Lower) Negative Factors, 2016 (Percent) Input Costs (Higher) Cash Rent Rates (Weak) Livestock Losses Stock Market / Economy/Global

29 Sale activity index (% reproted more - % reported less)*100 Percent change Farmland supply tends to be tighter in down years 160 ISU sale activity index and percent change in Iowa land value, (% reported more sales - % reported less sales) % % 20% 80 10% % 20-10% 0 Land Value % Change Sale Activity Index -20%

30 Number of Public Auctions Limited farmland supply tends to bolster land values 250 Number of Public Auctions by Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Farm Credit Service of America

31 Looking Ahead

32 Cash Crop Price Predictions for Nov 2017, 2018, 2020 Cash Corn Prices Cash Soybean Prices Northwest $ 3.34 $ 3.65 $ 3.98 $ 9.25 $ 9.61 $ North Central $ 3.42 $ 3.59 $ 3.93 $ 9.16 $ 9.46 $ Northeast $ 3.41 $ 3.59 $ 3.95 $ 9.19 $ 9.28 $ 9.76 West Central $ 3.34 $ 3.59 $ 4.02 $ 9.12 $ 9.33 $ Central $ 3.36 $ 3.50 $ 3.77 $ 9.17 $ 9.40 $ 9.86 East Central $ 3.42 $ 3.58 $ 3.89 $ 9.26 $ 9.51 $ Southwest $ 3.31 $ 3.56 $ 3.94 $ 9.15 $ 9.42 $ South Central $ 3.36 $ 3.59 $ 3.90 $ 9.51 $ 9.76 $ Southeast $ 3.50 $ 3.83 $ 4.17 $ 9.49 $ 9.59 $ STATE $ 3.38 $ 3.60 $ 3.94 $ 9.24 $ 9.48 $ 10.06

33 Your estimates as of May 2017: Iowa land market stabilizing

34 Compare your estimates last year - Iowa land market stabilizing

35 Source: Purdue Ag Barometer

36 Source: Purdue Ag Barometer

37 Key Indicators to Watch Land Value = net income / interest rate USDA Farm Income Forecast Price Outlook Ag Exports / Exchange Rate China Ethanol, E-85, RFS Fed s move on Interest Rate Ag Loan Delinquency; Vendor Credit

38 Cap Rate (Rent-to-Value) vs. Farmland Loan Interest Rate Cap Rate Rate

39 US Farm Income Source: USDA OCE 2016

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41 Key things to watch Interest rate hikes: SPEED & MAGNITUDE MATTERS Possible trade tensions and negotiations (China, Mexico) 2018 Farm Bill Discussions Possible Changes in tax policies - Estate tax reforms; step-up basis - Income tax: section 179, bonus depreciations - State ownership law

42 Ag Policy News -21% budget cuts for USDA USDA Secretary Perdue just confirmed this Monday The House and Senate Ag Committees have begun their exploratory hearings for the 2018 Farm Bill, but no firm policy declarations have been made. What little we have on ag policy comes from the President s Executive Orders and the Budget: withdraw TPP, review WOTUS rule, omnibus report on significant trade deficit

43 Facts and Alternative Facts about the Farmland Market

44 Iowa Farmland Purchases by Buyer Types Existing Farmers Investors New Farmers Other

45 Iowa Landowners tend to hold the farmland Years of ownership % of Iowa Farmland Less than 10 years 24% Years 21% Years 19% Years 15% > 40 Years 20% Source: Ag DM PM Iowa Farmland Ownership and Tenure Survey

46 Percent of Farmland % of Iowa Farmland by Age and Life Stage of Owners 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% < > 74 Source: Ag DM PM Iowa Farmland Ownership and Tenure Survey

47 Iowa Farmland Purchases by Seller Types, 2016 Active Farmers Retired Farmers Estate Sales Investors Other PERCENT Northwest North Central Northeast West Central Central East Central Southwest South Central Southeast STATE

48 Percentage of Farmland Method of Anticipated Transfer % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Will to family Will to others Give to family Give to others Sell to family Sell to others Put in trust Other Source: Ag DM PM Iowa Farmland Ownership and Tenure Survey

49 S&P 500 vs. Farmland Values: A Question of Timing 1960 Source: Mike Duffy Ag DM Newsletter June 2014

50 S&P 500 vs. Farmland Values: A Question of Timing 1980 Source: Zhang and Duffy Ag DM Newsletter April 2016

51 S&P 500 vs. Farmland Values: A Question of Timing Return to S & P Investment Relative to Iowa Farmland Investment Source: Zhang and Duffy Ag DM Newsletter April 2016

52 A New, Interactive Iowa Farmland Value Portal

53 Iowa Farmland Value Portal twitter #ISUland value

54 Iowa Farmland Value Portal ww.card.iastate.edu/ farmland twitter #ISUlandvalue

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56 Thank You! Wendong Zhang Assistant Professor and Extension Economist 478C Heady Hall Iowa State University