Farmland bubble concern not felt in West
Though farmland has increased in value over the past decade, economists and real estate agents alike agree that there is little danger of the “bubble” bursting in the West, if a farmland bubble even exists.
“I’m not sure there is a farmland bubble in the Midwest,” comments Stephen Koontz, associate professor at Colorado State University’s Department of Agricultural and Resource Economics. “Even in our region, land prices have gone up, certainly not as much as in the Midwest, but they have increased.”
Koontz predicts that, while land values will soften, there won’t be a dramatic decrease in prices or burst in any bubble.
Bubbles in real estate are created when large amounts of debt are acquired in purchasing land.
“We get into trouble with bubbles in real estate when we have high loans as compared to the value of the land,” explains Koontz. “If the value of land decreases suddenly, people are underwater.”
However, in the current situation, Koontz says that there is very little debt being acquired in purchasing land. Rather, investors with large amounts of capital are buying land and generating cash returns in leasing the property.
“Investors with big piles of capital are looking for places that create returns,” he continues. “They are used to buying bonds, but today, bonds don’t pay. One of the things that big piles of capital does is buy land, and investors lease the land back to the farmer.”
Investors are generating cash returns from their purchases. At the same time, they haven’t borrowed money, so the likelihood of a bubble forming is significantly less.
Ag producers are purchasing land and driving land values and prices up, Koontz explains, is because of the good returns they have seen in their commodity businesses.
“Even with the drought in 2012, producers have been able to buy land, pay mostly cash and borrow relatively little,” Koontz adds.
Torrington Realtor Casey Essert even sees investors entering land markets in Wyoming.
“A lot of folks that are buying land are investors, and they are looking for a decent rate of return on their money,” Essert explains. “They want good farm ground, so they have good tenants and receive a good rate of return.”
Essert predicts that strong demand for those lands will continue.
Land in the West, however, is very different from the Midwest, adds Koontz, based on quality of the land and availability of water.
“The further west we move, there is less pressure to move up in prices and there are more differentials between values,” he explains. “If land has predictable rain or better pasture, senior water rights or those types of things, it is much more valuable.”
John Pearson, owner of Pearson Realty in Buffalo, says, “Since about 2000, land prices have increased substantially.”
Even since mid-2011, when the recession started to lift, he adds that the volume of farm and ranch sales has increased, and the value of agriculture land in Wyoming has increased roughly five percent.
In Wyoming, Essert notes that good farmland has increased in value, noting, “Good, high-producing farmland with center pivots is in very strong demand.”
Top-end farm ground, Essert adds, could sell for as much as $4,500 per acre.
“We are seeing a very steady increase in ranchland values, and probably a more dramatic increase in farm values,” Pearson notes. “Farms are selling very well and prices have gone up substantially because commodity prices have been good all the way through.”
Looking to the future, Koontz, Essert and Pearson differed on their predictions for the future.
“I think we will see land prices not got down, but certainly not go up as much,” Koontz says. “I don’t think we have a bubble, but it also depends on the value of the underlying commodities.”
If corn, wheat or hay prices dramatically decrease, then land values will start to get too high.
“I think commodity prices will soften,” he says, “but I don’t see all of those commodities going down that much.”
“When commodity returns soften – which will be this year – then the pressure on land prices will soften,” Koontz continues. “What matters is how quickly commodity returns soften, and that depends on demand and the weather.”
“Whether there is a bubble or not, I don’t know, but the fundamentals driving the value of really good ag land will continue to stay in place,” Essert notes.
In general, Essert adds that high demand will likely continue, with investors continuing to make land purchases.
Pearson, on the other hand, sees a stabilization of prices and a moderate decrease in value looking into the future.
“The higher prices have been driven partially by lower interest rates, and we’ve had good commodity prices,” says Pearson. “As we go forward, we are not going to see, in my opinion, a bust of land prices.”
“What we are going to see, is something like sticking a knife in a tire,” he explains. “It is going to be a very slow, moderate decrease in land value across the West.”
At the end of the day, Pearson foresees a stabilization of land values, rather than a sharp increase or decrease.
Either way, Koontz says, “I don’t think land is going to be a great buy now. I think we will be hard pressed to get the rates of return that we have seen in the last four or five years. I don’t think that people buying land will be acquiring debt to do so.”