Presentation on theme: "Factors Affecting Farmland Markets Bruce J. Sherrick University of Illinois The Changing Landscape of Ag Banking in Illinois IBA Ag Banking Conference."— Presentation transcript:
Factors Affecting Farmland Markets Bruce J. Sherrick University of Illinois The Changing Landscape of Ag Banking in Illinois IBA Ag Banking Conference Sept. 7-8, 2006 – Springfield Illinois visit us at:
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
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
“Illinois farmland will only experience about 4-5% average appreciation in 2005 ” -Bruce Sherrick, 2004 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.” “I was wrong. Again.” - Bruce Sherrick, 2004, 2005, 2006, etc. - George Morrow, 1886
Illinois Farmland Markets… cont. compounded increase of 5.7% per year
Capital Gains Rates and Values
Components of return to Farmland
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
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 Farmland Turnover -- Illinois
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): – : 5.6% – : 5.7% – : 2.0% – Q2: 5.7% (est.) – Illinois average increase 28% (USDA) – 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
Returns and volatility,
Relatively smooth returns series
… and fairly attractive levels
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…..
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 (-) SPR (+++) Distance to Chicago (++) Distance to metro location (++) Ruralness indicators (--) CPI (++) Population (+) Income (+) Livestock activities (+/-)
Land Market Information – ISPFMRA annual survey
ISPFMRA Land Value Trends Area 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%
ISPFMRA Survey says…
Estate sales prevail..
Estate settlement leads motivations..
Investors remain main buyers..
Attributes of buyers include … 56% of buyers used 1031 exchange funds –up from 48% year prior, down first half of % of buyers did not use debt capital –increase of 10% from year prior
§1031 Buyers driving market up..
Chicago impacts dominate..
Price Increase Expected in 2006
Stable Trend expected for 2007
Cash rent and custom farming returns thought to be higher..
Cash Rent variability by quality..
Cash rent leases still most prevalent
Growth expected in fraction of cash rent leases..
Contemporary Issues: Role of government (payments average 24% of income, 32% pre-, regulation, and changing program design and emphasis) 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
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