The University of Illinois TIAA-CREF Center for Farmland Research’s director, Bruce Sherrick, tells Agri Investor that slow farmland sale turnover will continue to support land prices, and that aging operators do not necessarily mean more sales.
How have low grain prices affected farmer borrowing over the past few years?
There was a lot of capacity to absorb the first couple of years of losses. Over the past few years people worked down their debt. They stored a lot of their excess capital in the form of new equipment, cash and so on, [but it’s still] been tough.
Those with high rental to [ownership] ratios, or low tenure positions, are the first to demonstrate stress. For some, their operating loans have become increasingly complex and they may be beginning to stress their lending limits. Farmland values have come down, but not by nearly as much as many people were expecting. Farmland values don’t move as much as income ,and income doesn’t move as much as commodity prices. Farmland values are also buffeted by the fact that there’s very little turnover and very low interest rates.
Is there a certain point where you would expect operating losses to drive an increase in sales turnover?
There are some cases, mainly in larger farms with large amounts of rented acreage, where the working capital crunch and the need for operating loans has triggered a sale. For example, a farmer might need to sell 80 acres to put a crop on the other 3,000. But we’re seeing anecdotes. I don’t see it as a widespread tsunami about to happen.
When incomes go down, there’s a balance sheet effect, but it doesn’t generally trigger a sale any more than a run-up in prices might. Because farmland turns over so slowly, if you get rid of it once, you don’t get it back. And because you only maybe get one chance in a lifetime to buy the neighbour’s farm, that becomes a buffeting source in the market as well. If we get more equity vehicles into the sector — ways of getting investments into and out of land — I think turnover could tick up a little.
Are we near a point where you an influx of institutional investment could affect market dynamics?
Institutional investment interest in US farmland has gone off the charts, but in terms of the percentage of total land held [by institutions] it’s still very low. If we add all the Real Estate Investment Trusts and farmland managed for institutions that report to NCREIF — even suppose I’m off by a factor of two — at that point we’re still only looking at one half of one percent of farmland in the US.
Could we see an aging operator class pushing more farmland onto the market?
This is a theory that gets thrown around a lot. But it’s never been the case that when farmers get older, they’re more likely to sell at a certain tick-off age. We are seeing that as farms get larger, they bring more operators on. So dad brings in nephew, son, hired-hand, and a cousin. The number of operators goes up, and the age of the listed primary operator increases. That doesn’t seem to result in a lot of farmland coming onto the market; maybe a little, but there’s not going to be a wave.
Are there other trends that you think could dramatically affect the sector in the near future?
I don’t know how near-term this is … but I think the agtech space is moving faster toward a place where it’s changing firm boundaries [of] how connected the consumer is to [produce]. There is some persistence in the idea that consumers want to know more about their food and feel more connected. The ability to transmit a price signal backwards about an attribute is getting better. It’ll be interesting to see how the sector begins to consolidate these 60 or so big data in agriculture companies. Farm to fork movements will matter.