Dirt Rich

Agricultural land values are high and attracting investors.



photograph by Benham001 | Dreamstime

Chances are you’ve seen the scene so many times that it’s burned into your memory: Scarlett O’Hara silhouetted against a red sky, on a grassy hill overlooking her beloved plantation, Tara, the land she has finally returned home to in the final scene of Gone with the Wind.

It’s not only a nostalgic moment but a practical one as well, it turns out. When Atlanta burns, or when the stock market crashes, or when any other calamity with economic consequences occurs, farm land is still there. Though determining its value and how long it will keep its value can be puzzling.

Right now agricultural land values are soaring and inventory is at a historic low as investors great and small return to the one market which, nostalgically or practically, always seems to be the one safe bet.

“You know the old saying [about land],” says Gary Gaines, CEO of Mississippi Land Bank, a cooperative-style financial lending institution focused exclusively on loans for agriculture. They’re holdings touch all of the counties in northern Mississippi.

“They’re not making any more of it,” Gaines finishes.

Mississippi Land Bank has more than 20,000 active land loans according to Gaines, the average amount of which is $260,000.

Many are amortized over 15- or 20-year terms, but few make it to maturity, either because they pay off early or because the borrowers have new needs later on and refinance. Either way, it’s a lucrative business in 2013.

“The pricing might be a five- or 10-year fixed rate and if the loan goes to maturity it will be repriced during an amortized period,” Gaines says. “Our average age of a loan is about seven to eight years on the books, and that takes into consideration that we refinance a lot of our loans by making new loans to existing customers. But to be quite honest very few of our loans go to full maturity.”

Interest rates are fueling sales, of course, but so are returns on investments.

Land banks, Gaines explains, are different from regular commercial lenders in that all borrowers are required to buy stock in the cooperative. They elect the board of directors, indirectly giving themselves some control of the direction of the organization, and at the end of each year, they receive a patronage — a return of some of the interest they paid on their loan.

“We’re experts in land, agricultural business, and production loans,” Gaines says. “That’s what we do. We’re not allowed to get into commercial lending like shopping centers and hotels. We’re restricted to agricultural lending.”

So who is buying and who is selling?

Sellers are the time-tested, tied-to-the-land farmers who’ve made their careers and homes on farms over generations, and now need a way out.

“The sellers are generally people who are not actively on the land anymore,” says Wayne McGowan, an agent for McKee and McFarland, a commercial real estate firm with services that agriculture real estate brokerage. “They are people wanting to retire, farmers who want to farm for four or five more years but then want to wind it down. They’ll sell the land and lease it back for a few years, and get the money they need for retirement.”

 

 

 

photograph by Gigraa | Dreamstime

Right now the money is good, so why not sell now and retire a few years later, so the thought goes.

Absentee landowners, who may have inherited the land as their estate but live far away are also selling while the prices are up, turning land into cash that is easier to divide among five siblings or 15 grandchildren.
On the buyer’s side, things are a bit more complicated. Who is buying depends largely on the acreage of the land in question.

“When investors come in and buy large tracts, they are not necessarily owners forever,” McGowan says. “In West Tennessee, you normally have an opportunity to buy a farm once in your lifetime. A farm would come up for sale every 40 to 80 years. When investors get into it, they will be there until they see a better investment somewhere else.”

Investors currently interested in farm land may be a group of retirees, fed up with a volatile stock market and lured in by the promise of a 4 percent return, according to McGowan, potentially 1 to 3 percent more than the return on other commodities.

The 1980s saw agricultural land prices rise sharply as well, only to plummet a few years later, but McGowan still thinks the current prices are justified by the market.

Gaines agrees, though neither expects the rise to last forever.

“I don’t think there is a bubble right now,” McGowan says. “I think you could be looking at some correction in farmland, but I think it’s a good time to be an owner of agricultural property.”

“Two of the factors [that would cause a fall in land prices] would be if we saw a significant drop in commodity prices, which right now are at an all-time high,” Gaines says. “If we saw a significant increase in interest rates, it would definitely impact the value of agricultural land.”

And, frankly, what else is new? Gaines points out.

“Sometimes the cycles extend out longer than others, but it’s always been up and down,” Gaines says.

What might potentially keep investors focused on their farmland? There’s been plenty of discussion of new innovations in agriculture, specifically new crops and new uses for existing crops, most notably the conversion of plants into ethanol.

McGowan, who is president of the Memphis Agricultural Club, says that farmers are discussing it but not ready to give up on rice and soybean yet. The club meets monthly except through the summer to stay connected and keep abreast of legislation, consumer issues, and to hear speakers. (For more on the Memphis Agricultural Club, read the story on page 33.)

“There’s some excitement within our club,” McGowan says. “[Biodiesel] has been talked about for at least eight or 10 years. But in the last few years, several ethanol plants have had to close due to financial concerns. Biodiesel could be the same thing. It’s great. It’s needed, but it’s not the new soybean.”

Farmers are a practical bunch after all.

 

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