Halderman: Land value drop creates buying opportunity

Howard Halderman, whose institutional clients include the New Mexico Education Retirement Board, argues that lower prices make now a good time to invest in the US farmland space.

Howard Halderman, founder of Halderman Real Asset Group, whose institutional clients include the New Mexico Education Retirement Board, argues that lower prices make now a good time to enter the US farmland space.

The rapid appreciation in farmland values which started in 2008 caused many to be cautious when considering the asset class.

However, consistent cash returns, zero vacancy rates and low volatility make farmland a long-term asset worthy of consideration. Over the past decade US farmland has developed into a viable investment for many individual and institutional investors.

Farmland values for row cropland across the centre of the US peaked in late 2013 or early 2014. Since then declines of 15 to 25 percent have occurred, depending on the location. Considering the long-term fundamentals, investors might consider now a good time to build a farmland portfolio.

Food production must double by 2050, according to studies. In addition, a growing middle class population will demand more protein and there are increasing water constraints in many geographies. These factors make it easy to be bullish on core agricultural investments in the US for the long term.

Farmland values are based on three factors: farm incomes, interest rates and the supply of farms on the market. They are not equal in impact. Farm incomes are weighted at least 50 percent with the other two 25 percent each.

Net farm incomes started to decline in 2014 and are predicted to continue to remain low in 2016. Gross farm incomes for corn were well in excess of $1,000 per acre in 2012 and 2013, but are now below $800 per acre and near break-even. This drop is due to much lower commodity prices for corn, soybeans, wheat and rice.

Farmland rents waned as a result. Varying by location and quality, land rents are down 10 to 25 percent across the Corn Belt, Great Plains and Mississippi River Delta. This decrease is reflected in the underlying sales prices of the land.

Interest rates remain low (less than 5 percent for long-term fixed rate mortgages) and the supply of farms for sale is also at 75 percent of the long-term average. Historically 2 percent of all farms sell annually. These remain bullish factors, but are old news.

This recent downturn in land values creates the best buying opportunity since 2009 for an investor to purchase productive farmland at values that are off all-time peak and are sustainable. The fact that the market could drop another 10 to 20 percent opens the door to make even better purchases in the next 2-3 years, although there is no guarantee this ebbing will occur. If you are considering entering the farmland space, the timing might be just about right.

Howard Halderman founded Halderman Real Asset Management, whose institutional clients include the New Mexico Education Retirement Board, in 2013 and is now executive chairman of US Agriculture’s Board of Managers. USAG was formed through a merger between HRAM and USAG earlier this year. The firm focuses on US farmland investments.