Destination Unknown: The agricultural land map is getting harder to read as buyers find both challenge and opportunity ahead.

Despite the challenges, this sixth-generation cotton farmer notes they’ve been lucky. VIP Farms, based in Thatcher and named for Matthew’s grandfather, Verle I. Palmer, was able to buy some crop ground last year. The owner had hoped for investor interest, but when that didn’t happen, the land came back up for sale. It was a rare opportunity for Palmer to add acres to his operation.

OFF THE PEAK. “In this area, land is going for $2,000 to $10,000 per acre right now. There was a time, though, when owners were asking up to $20,000 an acre. We saw that trend down as less investor money came into the market,” he explains.

The land least likely to draw the interest of developers is close to the Gila River. Palmer explains these areas are prone to flooding, making them too risky for anything other than agriculture.

The Gila Valley is a tight-knit farming region consisting of some 30,000 acres. Elevation is about 3,000 feet, making it “on the bubble” as far as cotton production is concerned. Despite that, the Palmers grow both Pima and upland varieties, averaging 2.5 bales on the Pima and 3.5 bales on the upland. The farm encompasses about 4,800 acres of leased and owned ground. While the major crop is cotton, they also produce some Durum wheat.

WATER NEEDS. With no dryland production, water availability and conservation are constant priorities. Most producers use surface water from the Gila River to furrow irrigate. Wells are also available. Some years, flooding is more the issue than a lack of moisture.

“Our area is unique in that we don’t pay for the water, we pay for the delivery,” Palmer explains.

The little-known valley is far from immune to many of agriculture’s challenges and trends. There are fewer, but larger, family farms here than in the past. When land comes up for sale, it’s often neighbor bidding against neighbor. Investors and developers have affected the market, as well as rental rates. And the ability to cash-flow farmland is a constant consideration.

Palmer says the sense of community in this valley has led to some unspoken rules when it comes to buying or selling farmland.

“It’s true, everybody knows everybody. So, it’s often common courtesy here that if production farming land comes up for sale, the producer who has been farming it will try to buy it if he can,” Palmer notes. “If he can’t, then others will come in and try to make something work. Most have the decency to say, ‘This guy farming this land, he gets first shot. If his financials don’t work, someone else can come in and buy it.’ ”

THE LARGER VIEW. Farm operators’ financials and commodity prices will be the driving forces behind agricultural land market fundamentals going forward. For some, that will spell opportunity, for others, loss.

Late winter and early spring will be pivotal times for land prices, believes R.D. Schrader, a land market veteran and president of Schrader Real Estate and Auction Co., based in Columbia City, Indiana. He expects low commodity prices and their impact on incomes could result in more need to sell land going into 2017. That would occur as farmers meet with their lenders to review financials post-harvest.

Producers in the best position, he adds, will be those who own more of the land they farm. He describes a situation with two opposite ends of a spectrum: at one end, operators who are highly leveraged; at the other, those who are still sitting on considerable cash (Schrader calls them “the savers”).

“This is a natural declination off the peak relative to the farm economy, which is relative to land values. It is a natural correction,” he says. “If incomes are down, it’s healthy for land values to come down.”

This does not mean, however, that land is no longer a good investment. For the long-term investor with cash, it may be quite the opposite.

“Historically, land has shown a lot of double-digit appreciation and strong returns,” Schrader explains. “I’m not here to say we’ll see double-digit appreciation over the next few years, but I do believe land will be a safe investment compared to other vehicles. For the most part, land buyers think long term. They know land prices will go up and down, as will incomes based on [prices for] commodities.”

As land prices trend down, Schrader adds poor land is off more on a percentage basis than better-quality land.

“You may have some really good pieces of land that bring what they did three years ago. There is still cash in this market looking for the right piece of property. But, in general, as commodity prices fall and incomes are squeezed, that cash gets more selective.”

THE CASH-FLOW QUESTION. Craig Dobbins, agricultural economist at Purdue University, is a voice of calm in an economic storm of worry and low commodity prices. He insists land prices aren’t going to fall off any cliff. They will, however, continue to move lower at a fairly predictable pace.

“Land prices are a function of, or are influenced by, the farm economy. They are moving down because of what is happening in the farm economy. I fully expect that to continue. My suspicion is they are going to be down [next year] by about the same percentage they were last year. So, another adjustment is likely coming.” (See “Today’s Trend Line,” on page 21).

Dobbins is concerned about operating funds, adding that after two years of tight margins (in some cases negative margins), some farmers have used up their liquidity. Lenders are going to be working this winter and spring to be sure they aren’t making loans that won’t be repaid.

“That is certainly going to have some effect on the availability of production loans, and this isn’t at all unusual,” he adds. “Some people will have difficulty getting financed next year without making adjustments.”

That does not, in his opinion, mean a lot of land will be coming onto the market. Dobbins doesn’t think producers are to the point of forced liquidations.

“One of the characteristics of the farmland market is that when values start to soften, people actually decide to hold. There is no reason to sell into a down market in most cases,” he says.

Any financial dangers on the road ahead will hit producers who are paying high cash rent first. They will be in the most precarious position as the market transitions.

“For those producers, it may be that bad,” Dobbins says. “Can you afford to subsidize high cash rents with equity from the land you own? If you’ve been doing that the past two years, and you’re going into the third, it can’t go on forever.

“That won’t necessarily mean more land will hit the market or that values will be pushed significantly lower. It will mean landowners will be forced to reevaluate their positions and recognize the reality of the market.”

On The Edge. Depending on where a producer farms, Sterling Liddell believes some may already be “right at the edge of liquidity.” The Rabobank vice president of the Food and Agribusiness Research Advisory Group, Missouri, says much of the liquidity has already been burnt out of ag producers’ economics, and farmers don’t have the working capital they will need to go into 2017. He insists the key to rolling the dice on one more year will be cash rent rates.

“If we don’t see a reduction in rental values, then we are going to have to finance more of those rents with any equity remaining on the farm. If producers do that, and they still don’t make money, farmers become insolvent, and they can’t raise money from cash-flow or from borrowing. Then, we see significant challenges, such as defaults on loans, the inability to cover cost of debt or interest. That will shake the land market.”

This means 2017 will be a pivotal year to where land prices go and the overall financial health of many farmers. Liddell believes U.S. producers are close to a tipping point without a significant downward adjustment in both land values and rents.

Some producers during the past four to five years have grown their operations at an extremely rapid rate, adding rental ground and machinery in a declining grain market. Liddell says while economies of scale have a place, farmers have to ask themselves the hard questions.

“How do you gain economies of size when you aren’t making a profit on the land you’re farming? If you pay too much for rent to get bigger, but you aren’t actually making a profit, you’re just increasing your losses,” he says. “It’s extremely important farmers understand their financial positions, especially from an equity perspective.”

Liddell says those with cash who buy land that is too expensive lose the cash. If they use equity, turning it from a balance-sheet value to a cash-flow value, that is also a risk.

“Right now, expansion is something I would be very careful about,” he says. “You need a breakeven or a profit in those expanded acres. The case for higher commodity prices is getting harder to make. Without a significant decrease in yields, we carry over enough stocks to very much limit any improvement in price next year. This leaves us with $3.50 to $4 corn as the new normal.”

CREDITORS IN CONTROL. Moving into 2017, the direction land prices take and the financial standing of the agricultural industry will, to a large extent, be in the hands of creditors.

“Those loaning money won’t be able to offer financing for land that isn’t showing a return, and that is where you start to see the real pullback as to which land is farmed,” Liddell explains. “If land can’t produce an acceptable level of income, an evaluation will be done at the credit level, and there will be a contraction of financing.”

Liddell projects it will be 2019 before the agricultural land market stabilizes, and producers can anticipate profitability or at least a break-even point from their operations.

“That is the horizon we need to look at. How do you make it through to 2019?” he asks. “If you are in a position where you’re out of cash and leveraging assets, and putting the health of your business on the line to make it through the next few years, you need to have a plan and focus on how to execute it.

“Start with the financial side, and look all the way through your marketing program,” Liddell continues. “It all needs to be on the same page. If you do that, there is opportunity ahead in the land market. But, that’s down the road, and you have to know where you’re going to make it there. This is not a time when farming year to year is going to be a good strategy.”

TODAY’S TREND LINE:

Accurate spot prices are not where the USDA’s annual Land Values Summary shines. Few would disagree the broad report tends to lean so much to the average that it’s hardly a reflection of what a particular parcel of land should cost. What the report does do well, however, is reflect price trends over time for agricultural land across the U.S. For now, that trend appears mixed and regionally biased. Here’s a brief overview.

CORN BELT. The region’s average price per cropland acre declined 1.9% from a year ago. This average reflects prices in five states: Illinois, Indiana, Iowa, Missouri and Ohio. Iowa continues to hold court as the highest paid state for cropland per acre at $8,000 (-2.4%). Missouri is at the low end at $3,770 (-1.0%). In the middle, Illinois is at $7,450 (-2.6%); Indiana at $7,000 (NC*); and Ohio at $5,800 (-0.9).

NORTHERN PLAINS. Another region showing decline, acreage in many areas here was converted from pasture to crop ground. Some estimates put it as high as 1 million acres. The region’s cropland values as a whole dropped 5.4% from a year ago, with Kansas leading the decline at 7.2%, for an average per-acre price of $2,050. The highest per-acre average here was reported in Nebraska at $4,850 (-4.3%); the lowest in North Dakota at $2,000 (-6.5%). South Dakota averaged $3,520 (-5.6%).

SOUTHEAST. Regionally, average cropland prices increased 4% for this area, which includes Alabama, Florida, Georgia and South Carolina. Georgia led the run-up in prices, averaging $3,410 per acre (+7.9%). Alabama averaged $2,950 per acre (+3.5%); Florida $6,730 (+2.6%); and South Carolina held at $2,460 (NC). NC = No Change

DELTA. This region continued to see price improvement from a year ago at 3.1% more on average. Louisiana led the way with land averaging $2,620 per acre (+4.8%). Arkansas acreage averaged $2,710 (+3%); and Mississippi $2,680 (+2.3%).

PASTURE PRICES. Perhaps most predictable, given the market differentials between cattle and corn, pasture values showed less loss in those regions where prices were trending down and more upside in those regions with positive gains. Overall, pasture values held firm for the third year in a row at a U.S. average of $1,330 per acre. This included everything from a low of $350 per acre in New Mexico to a high of $5,100 in Florida.

Regionally, pastureland in the Corn Belt fell 0.8%. It was unchanged in the Northern Plains and improved in the Southeast (+2.9%), the Delta (+3.9%) and the Southern Plains (+0.6%).

For the full USDA Land Values 2016 summary, visit www.nass.usda.gov/Charts_and_Maps/Land_Values.

REGIONAL MARKET INSIGHTS:

Ground-level reports and projections from land-market experts show there’s still opportunity in the right areas for the right buyers. Here are insights from some of The Progressive Farmer’s key contributors on land prices:

• DELTA PRICES HOLDING UP. “The Delta states have been historically undervalued, and they’ve held up remarkably well in this challenging market. Two things will be important to where we go: interest rates and commodity prices. I think we could see some weakness, especially if we go without rallies in the commodity markets. I see the future for land prices as stagnant to slightly softening. But the key thing will be interest rates; that is concerning us. It’s very precarious. Bond liquidity is lower than it has been in many years, and if we see something big happen there, it would really impact agricultural land.” –Shonda Warner, managing partner, Chess Ag Full Harvest Partners, Arkansas (www.chessag.com)

• NO BLUES IN GEORGIA. “Georgia’s cropland values are doing good. Irrigated land is strong, with prices on center-pivot irrigated acreage from $3,500 to more than $5,000 per acre. Farmland is in high demand right now. Most of our crop is peanuts, yellow corn and cotton. The peanut and cotton ground is our peak land, and an uptick in cotton prices this summer helped a lot of farmers. Farmers are still our primary land buyers, and they are still cash buyers. Farmers here did well a few years ago, paid down their debts, and if they are leveraging, it’s no more than 50%. What we are watching moving into 2017 are input costs, especially petroleum prices. That can have a big impact not just on running a tractor but all of our inputs. As long as that stays down, you’ll see stability in this area.” –Wally Binns, auction coordinator, J. Durham and Associates, Georgia (www.jdurhamauctions.com)

• QUALITY KEY IN KANSAS MARKET. “Land values have declined some for most cropland, but high-quality ground in good locations is still bringing excellent prices. On the whole, we’re about 7% or more off the peak. Good quality sells well, and we expect high demand. Poor quality, with a lack of groundwater, is tough. We can hardly find a market for CRP ground now. The difference in the market compared to two years ago is that if we go to auction with a high-quality parcel of land, we may have two or three buyers instead of the five to seven we were seeing. As far as producers, we know you can’t sell crops at today’s value and break even. So, people are selling at a loss, and that creates stress. I don’t think a lot of people are digging into equity yet. I don’t see anybody selling out. Some guys are rebalancing, selling equipment or a quarter or two privately, but I know of nothing forced yet. I may be crazy, but I’m positive. I think right now is the worst of the next 12 months. Farm operators don’t buy land based on return, they are looking at the heritage thing. They don’t buy to sell. If corn rallies back to $4 and wheat to $5 or $6, things will turn around.” –Brock Thurman, commodity marketing specialist, Farmers National Co., Kansas (www.farmersnational.com)

• CORN BELT’S CAPITAL DRAIN. “If we continue to see $3 corn, it will drain working capital. Some of our data indicates we may have 5 to 10% with poor working capital; if that becomes 20%, this thing will change. Those producers may have to sell land to get their house in order. That would be a game changer. Those most vulnerable will be producers who do not own a lot of their land but aggressively bid up cash rents. Continued corrections in cash rents will be in order, with declines of 5 to 10% more possible in parts of the Midwest. Landowners who have been reluctant to reduce cash rents are under pressure due to inflation and land taxes in some areas. But after three to five years of low crop net returns, if landowners won’t or can’t reduce cash rental rates fairly rapidly, they will lose operators. It’s been a long time since we saw a decline in cash rents; in fact, you have to go all the way back to the mid-1980s to find several years in a row of decreasing cash rents. So this is becoming the new reality, and some have been slower to adapt to it than others.” –Michael Langemeier, professor of agricultural economics and an author of “Trends in Land Price, Cash Rents and Price to Rent Ratios for Iowa, Illinois and Indiana,” Purdue University, Indiana (ag.purdue.edu/commercialag/Pages/Resources/Farmland/Land-Prices.aspx)

• ROUGH SLEDDING AHEAD. “Texas land markets managed to post a small gain over 2014 results. Average prices rose 1.9% from $2,354 to $2,398 per acre. Price increases appeared to slow during the last half of the year, hinting that turbulence in oil and agricultural commodity markets had begun to affect the land market. Continued low agricultural commodity prices and futures suggest that profitability in the ag sector will continue to apply downward pressure on cropland prices. The strong dollar and the prospect for continuing low oil prices point to increased pullbacks into early 2017 for the cropland market.” –Charles Gilliland, research economist and contributor to “Texas Rural Land Value Trends,” Texas A&M, Texas (www.txasfmra.com/wp-content/uploads/ASFMRA-Land-Trends-2015_final.pdf)

• NORTHERN PLAINS SALES VOLUME. “There’s more land coming on the market at this time than I’ve seen in many years. I think that until now, landowners were unsure whether we’d reached the top, and now they believe the peak was reached. If they were on the fence about selling, they are seeing it’s probably time. The majority of buyers are still farmers, but lower prices will draw investors back in. North Dakota prices for high-quality land in the Red River Valley are ranging between $4,000 and $5,000 per acre, that’s 15 to 20% lower than in 2015. On marginal land, we’ve seen steeper declines of up to 35% with prices from $1,500 to $2,500 per acre. In South Dakota, top-quality land has held stable, and, in some cases, we’ve seen slight increases in auction attendance. As you move west, prices drop significantly once you get past the Missouri River pheasant belt.” –Brian Mohr, sales manager, Farmers National Co., South Dakota (www.farmersnational.com)