Farmland Booms and Busts: Will the Cycle be Broken? Kansas Society of Farm Managers and Rural Appraisers Salina, KS February 23 rd, 2012 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center
With the start of the 20 th century, farmland values began to heat up.
After World War I, farmland values caught fire with surging ag exports and excessively leveraged farms.
After a surge in bankruptcies and the Great Depression, the fire was out.
After World War II, farmland values started to heat up again as new technology was adopted.
New export markets and easy credit set farmland values ablaze, especially in the corn belt.
By 1978, Iowa farmland values were red hot and it was spreading throughout the region.
The start of the 1980s farm debt crisis began to cool the flame surrounding farmland values.
By 1987, forced land sales and a collapse in farm income put the fire out.
After the 1980s, a slow, steady recovery helped farmland values recover.
At the turn of the century, farmland values held steady until
a booming U.S. housing market as well as surging ag exports lit another fire under land values.
EXCESSIVE LEVERAGE PLAYED A SIGNIFICANT ROLE IN THE TWO FARMLAND VALUE COLLAPSES DURING THE 20 TH CENTURY TODAY?
1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012F Debt-to-asset ratios rose significantly during the 1920s and 1980s. Percent 35 30 25 20 15 10 5 0 1920s and 1930s Bust Farm Debt-to-asset Ratio 1980s Bust Today, Low Leverage Source: Agricultural Finance Databook (1910-1959), USDA (1960-2012F)
1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012F With easy credit, real farm debt levels and asset levels surged in the 1970s. Constant 2010 Billion Dollars 500 400 Total Farm Assets (inflation adjusted) Constant 2010 Billion Dollars 3,000 2,400 300 1,800 200 1,200 100 0 Total Farm Debt (inflation adjusted) 600 0 Source: Agricultural Finance Databook (1910-1959), USDA (1960-2012F)
Today, leverage in the farm sector is low farmland bust?
Ultra low interest rates are one reason why regulators are warning of a farmland bubble. Percent 6 Fed Funds Rate (Upper Bound) 5 4 3 2 1 0 Jan-07 May-07 Oct-07 Feb-08 Jul-08 Dec-08 Apr-09 Sep-09 Jan-10 Jun-10 Nov-10 Mar-11 Aug-11 Dec-11 Source: Federal Reserve Board of Governors
1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Movements in real interest rates also play a role in the farmland market opportunity cost. Percent 20 Real Commercial Paper Rates 15 10 5 0-5 -10 Negative Real Interest Rates -15 Source: Featherstone, Allen M. and Timothy Gl. Baker. 1987. An Examination of Farm Sector Real Asset Dynamics: 1910 85. American Journal of Agricultural Economics 69(3): 532-546, and Federal Reserve Board of Governors
Low winning auction bid, $325/acre (subject to flooding) High winning auction bid, $520/acre
While debt is not fueling the recent surge in farmland values today, ultra low interest rates are playing a significant role. Expected Farm Income Interest Rates = Farmland Values Capitalization Rates
Percent Capitalization rates and real interest rates tend to move together. 10.0 Kansas Capitalization Rate and Real Interest Rate 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Kansas Cash Rent-to-Land Value Ratio Yield on 10-year U.S. Treasury Security - adjusted for inflation 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: USDA, Federal Reserve and BLS
Dollars per Acre Historically low capitalization rates help support current Kansas cropland values. 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Kansas Capitalized Irrigated Cropland Values South Central Kansas Irrigated Cropland Value = $3,800 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% Cropland capitalization rate Authors calculations based on KSU Corn Cost-return Budget in South Central Kansas. Assumed 200 bushels per acre, a corn price of $4.75 per bushel, and 20% of gross revenues capitalized into land. Historical average cap rate, Farmland values drop by 25 percent
Dollars per Acre At a historical average cap rate and today s corn prices, current Kansas cropland values are reasonable. 5,500 Kansas Capitalized Irrigated Cropland Values 5,000 4,500 South Central Kansas Irrigated Cropland Value = $3,800 4,000 3,500 3,000 2009 average corn price, Farmland values drop by 35 percent 2,500 2,000 1,500 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Corn price (dollars per bushel) Authors calculations based on KSU Corn Cost-return Budget in South Central Kansas. Assumed 200 bushels per acre, a corn price of $4.75 per bushel, 20% of gross revenues capitalized into land, and cap rate of 6.5%.
In general, interest rates, through exchange rates, also have an impact on farm income. Expected Farm Income Interest Rates = Farmland Values Capitalization Rates
Over time, real interest rates and real net farm income tend to move in opposite directions. Constant 2005 dollars (billions) 125.0 100.0 Real Net Farm Incomes Less Government Payments (Left Scale) Real 1-year U.S. Treasury Securities Yield (Right Scale) Percent 7.5 5.0 75.0 2.5 50.0 0.0 25.0-2.5 0.0-5.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: USDA, Federal Reserve, BLS
If financial market stress were to rise, how might crop prices respond? Exchange Rate and Corn Price Indices Index = Jan. 2000 120 110 100 Trade Weighted Exchange Rate (Left Axis) Real Corn Prices (Right Axis) 2 Index = Jan. 2000 300 225 150 90 80 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 1 75 0 3 Source: Federal Reserve Board of Governors and Chicago Board of Trade
WHEN MIGHT INTEREST RATES RISE?
Most Federal Open Market Committee (FOMC) participants believe the first, appropriate increase in the Target Fed Funds Rate is 2014 or later. Number of FOMC Participants 10 9 8 7 6 5 4 3 2 1 0 3 3 Source: Federal Reserve Board of Governors (The number of FOMC participants who judge that, under appropriate monetary policy And in the absence of further shocks to the economy, the first increase in the target federal funds rate from its current range of 0 to ¼ Percent will occur in the specified calendar year. 5 2012 2013 2014 2015 2016 4 2
Could longer term interest rates creep up in mid-2012 or will there be QE3? 2/10/2006 5/5/2006 7/28/2006 10/20/2006 1/12/2007 4/6/2007 6/29/2007 9/21/2007 12/14/2007 3/7/2008 5/30/2008 8/22/2008 11/14/2008 2/6/2009 5/1/2009 7/24/2009 10/16/2009 1/8/2010 4/2/2010 6/25/2010 9/17/2010 12/10/2010 3/4/2011 5/27/2011 8/19/2011 11/11/2011 1-month 3-month 6-month 1-year 2-year 3-year 5-year 10-year 20-year 30-year 6% 5% 4% Yield 3% 2% 1% 0% Date Treasury Maturity 0%-1% 1%-2% 2%-3% 3%-4% 4%-5% 5%-6%
9/5/2007 11/5/2007 1/5/2008 3/5/2008 5/5/2008 7/5/2008 9/5/2008 11/5/2008 1/5/2009 3/5/2009 5/5/2009 7/5/2009 9/5/2009 11/5/2009 1/5/2010 3/5/2010 5/5/2010 7/5/2010 9/5/2010 11/5/2010 1/5/2011 3/5/2011 5/5/2011 7/5/2011 9/5/2011 11/5/2011 1/5/2012 How does the Fed return to a more normal balance sheet? Billion Dollars 3,500 3,000 2,500 Fed Agency Debt Mortgage-Backed Securities Purchases Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings 2,000 1,500 1,000 500 0 Source: Federal Reserve Bank of Cleveland
Concluding thoughts. Today, most farmland values can be justified given current market conditions. Yet, plenty of risks and questions surround the sustainability of farmland values. Rising interest rates would likely put downward pressure on land values.
Concluding thoughts. John Blanchfield, who runs the ABA Center for Agricultural & Rural Banking at the American Bankers Assn. stated, The FDIC is convinced there s a (farmland value) bubble, and they re not going to miss this bubble, by God. http://www.businessweek.com/magazine/farmland-is-pricey-the-fed-is-worried- 10132011.html In the end, we have to ask ourselves if talking about a land value bubble is the right risk to focus our attention on.
Thank you. Questions? Kansas Society of Farm Managers and Rural Appraisers Salina, KS February 23rd, 2012 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center