Farmers’ acquisitive mood outweighs macro concerns as US land appreciates

Buyers have shifted from auctions to sale-leasebacks at a time when trade tensions may significantly alter planting decisions, industry insiders tell Agri Investor.

Bucking concerns about trade and tighter monetary policy, US farmland markets produced an overall return of 1.13 percent during the second quarter, according to the National Committee on Real Estate Investment Fiduciaries.

In its latest quarterly index, the organization reports that US farmland returns comprised 0.65 percent income and 0.48 percent appreciation in Q2. Overall returns were below both last quarter’s reading of 1.32 percent returns and the 1.63 percent growth pace US farmland markets experienced in the second quarter of 2017.

But Steve Bruere, president of Peoples Company, said NCREIF’s reading reflected a market holding up better than expected. Though current returns have not attracted much additional interest to the market, Bruere said, a significant amount of institutional capital remains very interested to enter, under a variety of deal structures.

“A couple of years ago, the predominate method of sale was auctions and now you are seeing more below-the-radar sale-leaseback transactions,” Bruere reported. “It’s a more structured transaction and it may even include some buy-back provisions as well.”

The uptick in such sale-leasebacks began between 12 and 18 months ago, Bruere said. As noted in Iowa State University’s recent Farmland Ownership and Tenure Survey, Bruere added that these sale-leasebacks are less likely to include a crop-sharing component than similar transactions arranged during the last period when the structure came into widespread use in the late 1980s.

Farmers have been the predominant buyers creating the degree of appreciation reflected in NCREIF’s Q2 reading, according to Bruere. The fact that a significant portion of that appreciation has come from a cap-rate compression on overall returns raises important questions at a time when uncertainties surrounding tariffs and interest rates cloud the outlook, he noted.

“Institutional investors have a higher return expectation than farmers. As the farmer becomes less active and the investor capital becomes more active, [investor capital] is going to have a higher return expectation, which could slow down that appreciation.”

Trading sideways

NCREIF noted that all but one region saw some degree of growth during the second quarter, with 7.01 percent total returns in the Pacific Northwest (Oregon and Washington) outpacing 2.06 percent growth in the Southeast (Alabama, Florida, Georgia and South Carolina) and 1.31 percent growth in the Delta States (Arkansas, Louisiana and Mississippi). Depreciation of 0.70 percent helped lead to a 0.15 percent negative total return for surveyed farmland properties in the Lake States (Michigan, Minnesota, Wisconsin), the only region to see such a loss.

“This was the eighth straight quarter, and the 17th quarter out of the last 18, that the Lake States Region has posted depreciating values, resulting in a decline in value of 15 percent for the region since Q4 2013,” NCREIF wrote.

The Lake States’ connection to volatile commodity markets helps explain its continued struggles relative to other regions, according to Doug Hensley, president of real estate services at Iowa-headquartered farmland broker Hertz Farm Management. Hensley told Agri Investor that NCREIF’s findings are largely in line with his view of the current farmland market in the Midwest region, where his firm is most active.

“Illinois has been slightly weaker. Iowa has been slightly stronger. Nebraska has been slightly weaker; it just depends where you are, whether there’s a bias towards slightly weaker or slightly stronger,” Hensley said. “In the Midwest, it just seems like a sideways-trading market overall and the returns that have been posted have been based totally on income.”

Though stronger-than-expected commodity prices provided a bit of a cushion to some in the market this spring, more recently, Hensley said the effect of ongoing trade disputes has added to the financial pressure on landowners. There hasn’t been a dramatic change in profitability at the farm level, said Hensley, but the prevailing uncertainty has helped further bifurcate the fortunes of farmers with more and less leverage on their properties.

Hensley hazarded that the uncertainty brought on by tariffs and the potential for interest rate hikes will impact farmers’ planting decisions, which are usually made in the late fall or early winter. Because input suppliers offer discounts based on how early farmers are able to place orders, farmers will face pressure to act quickly, according to Hensley, who predicted many would nonetheless wait as long as possible for a clearer policy signal.

“People have been a little bit soybean heavy, because at $10 or $10.50, soybeans have been a slightly more profitable crop in recent years than corn has been,” said Hensley. “It costs more to grow, as well, but corn has typically been more profitable to grow and in the past two years in particular, people have been heavy on beans because the commodity markets have been a little out of whack because of heavy, heavy demand for soybeans.”