Scythe & Spade Blog

Farmland Pricing: Regional Differences

by Chas Bonner

Over the past year, we have read countless articles about “Irrational Exuberance” as it relates to farmland prices, and we have written blogs about it. However, as is usual, the devil is in the detail. One can see huge differences around the U.S., many regions being even more “irrational” and others surprisingly modest.

The most irrational region appears to be the Pacific West, which by definition is only California in the data provided by National Council of Real Estate Fiduciaries (NCREIF). In all U.S. regions, there are annual and permanent crops subdivisions, and the return is split between crop returns and appreciation of land. The base index for all regions and crop types is the first year NCREIF began charting, namely 1990, and all 1990 bases equal 100.

In the Pacific West (California), the index for first quarter, 2012 is 1246, or a total value roughly 12.5X 1990. That number is comprised of both appreciation of property plus return of crops each year. In the case of CA, the appreciation of the land is only 219, or about 219% higher than base year, but the crop returns have been 599.5. Those numbers are for ALL crops in CA, both annual and permanent plantings. When looking at permanent plantings only (fruit trees, vines, tree nuts), we note even bigger disparities. The total index for permanent plantings today is 1376, comprised of 194 for appreciation, and 749 for crop returns. Yes, we have all read about the monster returns of wine grapes, almonds, pistachios, walnuts, clementines, etc. Has it become irrational yet? We know plenty of professionals who are now sitting on the sidelines.

The biggest surprise for us has been the Pacific Northwest. For some reason, despite annual cash returns on a par with the rest of the nation, appreciation of land has lagged. With California as a reference (above), the relative numbers for the Northwest are 348 as a total index, with 105 being appreciation and 334 being crop income.

Problems do become opportunities, just as “one man’s trash is another man’s treasure.” At the same time, prudence dominates our thinking.

Calculated Leverage

by Monte Nevitt

One of the significant points made in this year’s Urban Land Institute conference held yesterday is that banks have cheap money available for land deals but no one appears to qualify. The bank’s dilemma? They can’t find credit-worthy borrowers. The downturn has left so many of yesterday’s landowners upside down in the greater Phoenix market that the previous players don’t qualify for loans today. It is ironic that the patient and disciplined farmer, who decided to stay on the sideline during the irrational exuberance that was displayed during the last boom is the very individual who is now going to his lender to qualify for the loan to buy back the farmland.

Strong commodity prices, coupled with depressed land values leave today’s farmer with an opportunity to leverage to increase the production and revenue, to address loan payments, to replace aging equipment, or to expand the size of the operation through purchase. In some cases we see dairy farmers buying land, not so much because of a desire to expand – but rather to shore up acreage on which to raise hay to bring their feed cost down.

Ninety five percent of the last thirty five land deals done in Pinal County were closed by farmers or ag related entities.

An article in last Friday’s Phoenix Business Journal highlighted the use of leverage in today’s favorable ag climate to expand and to improve the agribusiness bottom line.

Of particular note in this article is that the Journal highlights a farm purchase in which Scythe & Spade played a key role. The opportunity presented itself for a purchase and expansion onto 1,000 acres in the south Coolidge market. The deal would require a 30 day close. It also required two separate appraisals, a bridge loan of $5.4 million, preparation of material, due diligence, and budgets for a loan underwriting committee, shared well and ditch agreements????, opening and closing escrow, all in a 30 day time period!

Scythe & Spade was able to open its files and due diligence binders, plot in and pull down GIS maps on the property, update budgets, provide materials to appraisers, loan officers at M&I, and to the buyer, coordinate a 1031 exchange, and close escrow by the 22nd of December. In short – the seller , the buyer, the lender, the appraiser, the neighbor/partner, and Scythe & Spade all ended up looking good on the deal.

Take home point: because of Scythe & Spade’s ability to coordinate the deal, this farm family was able to seize a unique opportunity, come to alevel of comfort on a very shortened feasibility, acquire a loan from a cooperative BoM/Harris Bank, and be poised to take advantage of a forgiving commodity market going into 2012 on an expanded acreage.

Non-Blog Blog

by Chas Bonner

Knowing that consistency is important in the area of information dissemination, we are sending this short blog. However, it is used solely to make sure our readers have seen the article just sent by Brett MacNeil, and covering a very important topic to farmers today.

Note the link to his article entitled “IRRATIONAL EXUBERANCE.”

We have already seen positive feedback from readers.

To Sell or Not to Sell

by Chas Bonner

The $64,000 question:

U.S. farmers are aging, with average farmers over 57 years old, and now they are facing that question---probably the biggest of their careers. Do we sell the farm that has been in our family for generations, do we sell part of it to liquefy, do we rent out to professional managers, or do we let our “un-tested” children take over?

First, remember one thing: If you are faced with that decision, consider yourself lucky. Most are merely faced with the decision of retirement and having nothing to sell, plus wondering when their Social Security will run out.

Farming and ranching are usually occupations that chew up capital, leaving owners cash-poor and asset-rich. Therefore, the necessity of an exit strategy---the subject of our blog a few months ago. Our best advice would be to consider this early, looking at absolutely all aspects of the decision. We have all heard the maxim that “timing is everything,” and a farm sale decision is a critical timing question. My 20 year history in the merger/acquisition business demonstrated that maxim in spades: Out of many businesses sold over 20 years, 95% were over their peak; owners simply waited too long to pull the trigger. Perhaps that was evidence of another maxim: “Pigs get fat, but hogs get slaughtered.” In short, plan your work, then work your plan, even if 20 years away.

Another opportunity that is a combination of selling and holding, AND avoids the “cash-poor, land-rich” dichotomy is to sell part of the farm, perhaps to family members or to other farmers or to farming organizations. That strategy would enable you to liquefy your holdings, maintain input into direction, and provide an exit when too old to farm.

Finally, and perhaps most important, consider market context. If everyone is buying, now is the time to sell, partially sell, or rent. If on the other hand, everyone is selling, consider a buy. That is “industry timing” context. Next, if you see industry sale timing coming, prepare your farm to look like Grandma’s Apple Pie---“specific entity” context.

Don’t try to do this alone. There are countless services, attorneys, accountants, farm advisors who will provide valuable input.

A Farming Bubble?

by Chas Bonner

On October 18, Sheila Bair, chairman of the FDIC warned that the next asset bubble that could pop might be farmland. She stated that US farmland had escalated in price 58% since 2000. She has asked the FDIC to closely monitor farmland value for signs of instability like bubbles in housing and the stock market. She stated “A sharp decline in farmland prices similar to the early 1980’s could have a severe adverse impact on the nation’s 1579 farm banks.”

Much of what is driving this cost escalation are large pension funds, endowments, and institutions that are purchasing. We now sense some abatement in that pressure, since knowledgeable people are very aware of bubbles, having just gone through the housing and commercial real estate crises. Furthermore, commodity pricing has not followed land pricing on a consistent basis.

We have noted that most of the rapid price increase is occurring in the Corn Belt, primarily the eastern part that does not need irrigation. In Iowa, Illinois, Indiana and adjacent states, many farms have traded in the $5-7000 per acre range for raw ground with few or no improvements. Another area of rapid price increases is orchard ground in the far West.

However, we cannot forget that we are average temperature when one foot is in the fire and the other in a bucket of ice. So let’s look at some disparities. For instance, in 2007 the average price of farm ground in Illinois was $4460 per acre, $1000 in Montana, $3100 in Idaho, $3300 in Nevada, and a whopping $10,600 in Arizona, higher than any other state (per USDA figures, and 2007 are the most recent comparative figures we have).

Rather than comment on a national bubble, we should look at the location, crops grown, water rights and usage, soil productivity, output per acre, and relative regional values. There is no doubt that farmland has increased tremendously in price in the past decade. But the real question should be whether the land is worth it in your region, can you make a consistent profit at the price asked, does commodity pricing have a likelihood of increasing or holding firm, and will your asset grow or at least hold steady in value over the next 10-20 years?

Most of those questions are imponderable, so the astute investor says “BE CAREFUL.”

Blog #28 - 9/17/10

by Chas Bonner

THE HOUSING BUBBLE-BUST

One might wisely ask, “What is a blog about housing doing in an agricultural medium?”

First, every farmer lives in a house, and second, every person in the country knows what housing has done to our economy as well as to their own family economics.

But all is not doom. There have been some positive outlooks for months:

• The largest builders in the country are public companies, and because of heavy cost cutting, bond sales, government tax breaks, and asset sales, they are in sound financial shape. In fact, many have seen a doubling of stock price off the bottom.
• These builders have a reported $12 Billion cash, ready to invest.
• Building lots owned by these companies are actually on the increase. With a 60-80% decline in the number of homes built over the past 3 years, the demand for housing should increase dramatically when “Junior” finally finds a job, and moves out of his parent’s home.
• Many construction costs have dropped, though that will reverse if and when construction begins anew.
• Even the “Oracle of Omaha,” Warren Buffett believes the housing crisis should soon be behind us, and he is the owner of Clayton Homes. He should know.

Although we are still deep in the woods, at least we can see some light between the trees.

Expanding vs. Selling

Introduction by Chas Bonner

Jeri Engstrom is a man who knows first-hand about the subject of “expanding vs. selling.” He was a 4th generation farmer in Glasgow, Montana who decided to sell his stake in the 8000 acre family ranch to an investor who then rented back to Jeri’s brother. Jeri took some cash, and moved to a friendlier climate in Boise, Idaho at the suggestion of friends. He now brings his considerable farming talent and experience to Scythe & Spade. The farm’s loss is our gain.

by Jeri Engstrom

Expanding vs. Selling

This is the age old question for families in the farming and ranching community. There are a multitude of factors involved in making this kind of decision; let’s focus on a few of the main factors.

There are five primary reasons one may consider expanding:

First: Younger family members want to come back to the farm as a career. This is probably the most predominant reason for farmers to add acres to their existing operation.

Second: Shrinking profit margins. You can only produce so much off of that same sized acreage, yet after thirty years your expenses have doubled, tripled or quadrupled and the profits have not kept up, requiring expanded acreage to feed the family.

Third: Is there economic sense in the expansion move, i.e.: does it cash flow? Most farm ground bought by farmers is financed through a bank or sold under a contract for deed. Usually there is a 25 or 30 percent down payment made, then annual payments for usually between 10 to 20 years. Outfits like Farm Credit are more than happy to carry the paper for 25 years, but in the end, it all has to cash flow.

Fourth: Locality, what is its proximity to your current location. The farm ground right over the fence always garners a premium to the expansion minded farmer. Conversely, it will cost you money to drive 50 miles out of your way to farm a piece of ground you thought was a bargain (windshield time is expensive ).

Fifth: Long term investment is another important reason for expansion. When an investment like this is made in a family operation and combined with a life insurance policy for the surviving spouse, it can become a very sensible investment for generational transition and continuation of the family legacy of being on the land.

Now, what about the selling side? If you don’t have heirs or children that are interested in agriculture, your view of the future may be much shorter term. You and your spouse probably spent several decades on that farm, raising crops and kids, and making sure the farm does all it possibly can do for you. Now you want to see some of the world while you are still limber enough to enjoy it. You can’t do that if you take on more ground, more debt, more worry. You think this could be just the perfect time to sell. Land, over time, always appreciates and now you have a nice nest egg just waiting for you to use.

Some of the biggest positives to selling now would be:

• Lower capital gain taxes
• Becoming debt-free (possible for the first time in your life)
• Freedom
• Semi-retirement
• Move to a better climate

It takes a lot of soul searching, family discussions and mathematical calculations to make such an incredibly difficult and final decision, but it can be done. It will happen more in the future as well because the statistics currently show 45% of U.S. farmland is being farmed by people who don’t own it; that statistic is expected to climb to around 70% in the future.

Benefits of Leasing Property (Part 1 of 2)

By: Patina Thompson

Buying and leasing land is an investment many may not consider, but it has many benefits. Leased lands can benefit from responsible grazing and farming practices, as well as benefiting the landowner with a lower tax rate and some added income. Absentee landowners can get rewarded even further with a competent farm management company overseeing this sometimes complicated task.
According to the Assessor, Agricultural land in Arizona is land which is one or more of the following; Cropland of at least 20 gross acres, Ten or more gross acres of permanent crop, Grazing land with a minimum capacity of 40 animal units, or land devoted to high density use in the production of commodities including grapes and cotton for marketing. Lands classified as agricultural are taxed at a lower rate. This increases the profit margin to the landowner while simultaneously giving them a tax break. 
Farming of agricultural lands can greatly improve the marketability and, ultimately, the value of the land as a whole. As with any investment, advantages and disadvantages exist. Advantages are easy to notice if you can find a good tenant to steward the land. As a disadvantage, landowners are open to tenants doing damage just as with a residential lease and good tenants can be hard to find. During this wait, landowners incur the expenses associated with the land.
A grazing lease is another option with somewhat of a smaller risk for damage because you’re typically dealing with minimal equipment and minimal expenses paired with livestock.
Feasibility studies and budgets are helpful to forecast what financial gains are expected. Leases are typically based on an acre-unit or animal-unit basis and are paid annually. Feasibility studies can evaluate what returns you can expect within 3-5 year time frames. Scythe & Spade is familiar with rental rates for all areas of Arizona and can perform a financial analysis of your returns tailored to your long or short term goals.
If you have the luxury of owning any sized piece of dirt that’s not being utilized, you should think about the option of leasing. Scythe & Spade can provide an experienced farm and lease management team to oversee operations and locate tenants. Why not think about leasing and enjoy the many benefits it can provide? Contact us for a listing of available lands to lease or to inquire about leasing your land out from our diverse database of tenants, with a knowledgeable team behind you, it’s a win-win situation!

GREED or FEAR

Greed or Fear drives every market cycle.  This was evident in the late 80’s real estate boom and subsequent bust,  where irrational exuberance (Greed) drove land values beyond economically sound values, justified by a perceived shortage in land.  Fear materialized in the Resolution Trust Corporation’s liquidation of primarily defunct S&L non performing assets.  Again rampant speculation (Greed) drove technology stock prices beyond economically sound values in the Dot Com bubble which eventually collapsed.  Yet, we never seem to learn from our mistakes and Greed has once again driven Real Estate values beyond economically sound prices and today we see fear forcing a correction.  Although seemingly unpopular,  some economists argue that a recession could be good for America, and if a downturn is in the makings,  question whether the Fed should try to prevent it.  But that is another issue.  Are we becoming a nation of bubbles ?

To fully appreciate the effects of this latest downturn in the real estate market or any previous cycles,  we have to look more closely at land speculation.  Home builders, investors and even lenders have been caught off guard and our political leadership is currently seeking ways to cushion the fall and avert inflationary much less recessionary conditions in the future.  Land speculation is different than speculation in corn for ethanol for example.  Speculative farmers provide commodities without a contract or order.  If a customer does not materialize,  we add to the stocks on hand and prices fall.  It is often said, farmers are their own worst enemy and quickly solve boom and bust cycles by overproducing.  In the event exceptional profits accrue,  others will rush to cash in and increase supplies, thereby forcing equilibrium.  This competition effectively converts commodity speculation to more and cheaper commodities.  As a result, a Farmer must be a highly efficient, low cost producer to survive.  Fortunately, at least for now,  we do not anticipate a farming financial or supply crisis but rather see the potential inflation fueling commodity values in the short term with increasing volatility, especially in the grain markets.

Conversely,  land is not a commodity,  it’s supply is fixed and as such there is no automatic self correcting function built in. Currently and historically,  there have been no shortages of land to justify the speculation but we have seen more than one cycle where prices were inflated and subsequently crashed in search of equilibrium.  No one knows for sure how long this correction will take.  Wild cards include the Feds monetary policies, land owner’s willingness to sell at a loss and home builders willingness to adjust prices.  Every day we see headlines referencing troubling economic news about the national real estate market, crude oil values flirting around $100 a barrel and declining Global stock markets.  Buyers have disappeared overnight, more than 120 mortgage lenders are defunct and some sizeable banks are writing off huge losses. Liquidity in the market is severely limited.

No one knows for sure how long the correction will take.  Those of us in Agriculture are enjoying historically high commodity prices which I expect will correct in the intermediate term (with the exception of cattle markets that are limited somewhat by the gestation and growth cycle).  Certainly we know that speculative land prices will have to fall,  those speculators (and their lenders and Investors) who are holding high priced land in their portfolios (whether performing or non performing) will have to hold long term or similarly lower values to liquidate.  Lenders will start to see more and more defaults and have to consider their options and management capabilities in the speculative land class.

-BM

Plan for the Worst and Hope for the Best…but be proactive about it!

Mortgage delinquency rates hit their highest point since 1985 last month and while the data we watch is based primarily on home mortgages, it is a good metric by which to compare other real estate related debts.  In three different studies, we found that credit losses are likely to be around $400B.  Most of these losses will be carried by leveraged financial institutions, but a portion will be shouldered by seller’s who sold via a land contract, which is sometimes called an Installment Sale, Land Contract or Contract for Deed.

At Scythe & Spade we are particularly concerned about farm properties on the fringe of metropolitan areas, where increased demand from speculators and developers drove prices to irrational levels.  Many of these previously farmed parcels, in the hands of non–farmers, have sat idle, grown a crop or two of weeds, had irrigation and other farming resources and assets lost, removed or otherwise compromised due to a lack of maintenance and have lost their ag exemptions.  The result;  increased expenses, decreased revenues and numerous issues to be resolved.

Sometimes the lender, whether it be a financial institution or individual, is able to gain control of the property amicably through a Deed in Lieu of foreclosure.  But more often than not,  the process involves foreclosures, bankruptcies and litigation.  In such a situation,  the Trustee, Trustor and Beneficiary should mutually agree that, regardless of the outcome,  it is in everyone’s best interests to protect and then maximize the value of the asset, with any liabilities mitigated, until an agreement is reached.  Quite often however,  these parties can not or do not agree for a variety of reasons. 

Scythe & Spade can offer assistance by acting as either an operating or liquidating  receiver and take charge of the farm and facilities, protect resources and generate revenues, manage liabilities until either potential investors are identified and the assets are sold to a new investor or some other resolution is reached.  We have the financial and management expertise necessary to direct the operations and affairs of the asset and, if necessary, to liquidate the Property.

It’s not all bad news though,  there is a bright side to all of this too.  As a result of the weak dollar,  foreign demand has increased for everything from technology to tractors.  Soaring exports, ethanol subsidies, low interest rates (thanks to the Feds efforts to ease the effects of the .Com and now Housing bubbles) and record high commodity prices (agflation) have boosted farm income and stability and Lenders should not, as a result see many Farm defaults or foreclosures.

-BM