Mid-South Cropland Values
As we enter into another crop season, each one more challenging than the last it seems, a question I keep hearing from the coffee shop to business conferences is where are land prices headed? I’ve been involved in the land business (especially agriculture) since 1998 with my first job out of college as a Credit Representative to a Branch Manager in the Farm Credit System in Eastern Arkansas. I grew up in Eastern Arkansas in the middle of rice and soybean fields so I guess it’s in my DNA. Since 2003 I have been directly involved in marketing and selling land as a Real Estate Broker in the Mid-South, specifically, Arkansas, Louisiana, and Mississippi. From financing to buying and selling, I have seen a few trends since I’ve been in the business.
We’ve all seen the highs and lows of farming and the effects it has on land prices. Until recently, we were on a roller coaster headed to highs we had never seen. We were not on pace with our neighbors to the north and never reached the $10,000/acre plus range, but it was not uncommon to hear farmland selling well into the $5,000-$6,000 range and even higher than that in areas such as the Missouri Boot heel or Northeast Arkansas. There were even scattered sales in South Arkansas and Mississippi that bordered those levels and kept everyone guessing what the next high price would be tomorrow.
Commodity prices were the driving force for the sharp increase in land prices. There were buyers coming from everywhere into our region to buy farmland. The preference was high producing sandy loam soils but many figured out that clay-based soils produce excellent rice and a lot of it. The entire Mississippi River Delta was a hotbed for farmland buyers. Our land prices were the highest we had ever seen, but it was still considerably cheaper than farmland in the Mid-West. The farmland in the delta was seen as a value compared to other regions in the country. We had foreign investors, investment funds, private investors and farmers all wanting to buy more land and they were buying land at a record pace. As the commodity prices continued to rise, so did the land prices.
As for most things that go up, they will eventually come down. Commodity prices leveled off and started to fall in 2014 and have continued down all through the 2015 crop season and are at low levels as we have started the 2016 crop year. As the commodity prices have fallen farmers are finding it harder to be profitable at the rents that were being paid during the land rush just a few years ago. In general, the thought process is when the commodity prices fall, crop rents will decrease and land prices will fall.
That is the case in the Mid-West with cropland values decreasing slightly from 2014 – 2015 in Indiana (-0.7%) and Illinois (-0.6%) and slightly more in Kansas (-2.2%) and Nebraska (-2.1%). Iowa had the largest decrease in (-6.3%) with several other states remaining basically unchanged. The Mid-South cropland values have continued to rise with Arkansas (+3.5%), Louisiana (+5.0%) and Mississippi (+1.9%).
The question is why the difference? The Mid-West rose at a drastically higher rate, therefore had much more volatility compared to the Mid-South. Another factor is the Mid-West is primarily all corn and soybeans and the Mid-South has a variety of crops from corn, cotton, grain sorghum, rice, and soybeans. With corn and soybeans being the largest commodities by volume, it could have the greatest impact on the states that grow the most. The Mid-South with its smaller commodity markets in rice and cotton could hold up land values as long as the prices of those commodities are at a profitable rate to farmers.
Currently, land prices are stable in the Mid-South. There has been no increase in land prices with no change or a very small decrease in the past 12 months. However, there is very little cropland selling, therefore, the land values may be insulated since there are no sales. As we continue down this slippery slope of commodity prices with decreasing farm rents, the farmers will struggle to break even and there will be some land sales. Some of the sales will be farmers selling some land to stay in business or investors that that have overextended themselves or wanting to get out of the cropland market. Unfortunately, there will also be some forced sales due to bankruptcy and foreclosure. There will also be sales from the normal course of business due to deaths, estate planning and the hopefully continued IRS 1031 Tax Deferred Exchanges. (That’s another article for another day).
Currently, buyers and sellers are approximately $500/acre apart on most offers that we are seeing in the marketplace. Regardless if the farm is highly improved or a marginal farm, the price difference seems to be $500/acre. It seems to be a combination of three factors. Sellers either have not come to terms that commodity prices have decreased and therefore the land will not provide the investment level of most buyers, sellers have a sales price they must achieve in order to meet obligations or sellers are hoping this is just a small blip in the market and commodity prices will increase and the land values will increase again.
The buyers are very educated and know exactly what the sales price must be to obtain the desired investment return. Buyers are not motivated to purchase cropland if the return does not fall within the desired range. The only motivation we see in the marketplace are adjoining neighbors (rare chance to purchase the adjoining property) or an IRS 1031 Tax Deferred Exchange.
As we are planting the 2016 crop here are a few numbers from the USDA Intended Planting in the Mid-South. Corn acreage is estimated to increase greatly and soybeans are estimated to decrease in all the Mid-South states. Rice is estimated to increase by 21% in Arkansas, 5% in Louisiana and 47% in Mississippi. Cotton acreage is estimated to increase by 57% in Arkansas, 30% in Louisiana and 41% in Mississippi.
All of these numbers were estimated before the recent monsoons in the Mississippi Delta. With all the rain, I estimate that a large percentage of the corn acreage will be converted to soybeans especially since the Mid-South optimal corn planting window decreases after May 15th. If we are able to dry out, cotton and rice plantings will probably be on pace with the USDA estimates with a possible slight increase in rice acreage. If the rains continue, some of the cotton and rice acreage will convert to soybeans.
With increased cotton and rice acreage, the supply stockpile will only increase continuing to keep commodity prices lower or at best, break-even levels. In the Mid-South we are only along for the ride in the corn and soybean market. Our plantings do not affect those markets.
As this continues, the farm rents will decrease and land values will have to correct and reflect the changes in the market. It might take the land prices a little longer to adjust than other areas of the country, but in my opinion, we will head in the downward trend. This will not be a free fall and the land prices will be more of a correction to sell at a level that is still a solid investment for buyers. As markets open in our ever-changing world or weather catastrophes occur, the commodity market can rebound and the land prices will follow.
It may be a rough and bumpy ride over the next few years in the land market and during these times it is always best to seek advice from educated people in the business. Now, more than in the past few years, seasoned land brokers, attorneys, and accountants will be worth every penny for their services.