Shrinking US farmer capital creates ‘evident’ opportunity for institutions

University of Illinois' Bruce Sherrick reckons 'the neighbors are running out of money' in the Midwest.

Dwindling reserves of working capital among competing farmland buyers in the US Midwest could help provide opportunities for institutional investors, according to the director of the TIAA-CREF Center for Farmland Research.

Speaking to Agri Investor soon after publication of a report on Illinois farmland values, to which he contributed, University of Illinois professor Bruce Sherrick said that recent sales activity has displayed a variability suggesting a market finding its “soft bottom.”

“The neighbors are running out of money,” Sherrick said. “For institutional buyers, it may mean that there are reasons to become more active.”

As farmers increasingly encounter the need for more capital, he added, it has become evident that there is an opportunity for investors to provide equity in the form of restructurings, sale/leasebacks or sales that come with a right of first refusal and three years to buy back the property.

“Institutional buyers have to be part of that for this to work,” Sherrick said.

The report showed that “excellent-quality” farmland fetched an average price of $10,606 per acre across the state’s 10 regions in 2017, while buyers paid an average of $8,389 per acre for land classified as being of “good quality.” Second-tier land, which the report noted is often of interest to institutional investors, stood at around $6,057 for “average-quality” land and $4,604 per acre for “fair-quality” land.

Institutional investors accounted for 6 percent of the buyers in the state’s farmland transactions last year, with local farmers taking a dominant 62 percent of the market, according to the report. The second-largest share was captured by local investors, who were buyers in 13 percent of transactions. Non-local investors were buyers in 10 percent of deals.

After acknowledging the continuation of a decline in US farmers’ incomes that started in 2013, the report sounded a note of optimism and highlighted that Illinois farmland markets remain competitive through the state. Farmland’s characteristics as a safe haven will likely continue to attract investors, given low interest rates and “potentially volatile equity markets,” the study said.

“When farmers step aside, investors are looking for opportunities, especially in some of the more moderate land classes,” its authors wrote. “Larger tracts of land continue to draw interest from institutional investors, pension funds, international buyers and others. This source of demand for farmland in Illinois has likely kept values more stable than restrictive ownership states west of the Mississippi.”