Agricultural Land Trends Paul Stoddard Lecturer in Agribusiness

Agricultural Land Trends Paul Stoddard Lecturer in Agribusiness Department of Agricultural & Consumer Economics pstoddrd@illinois. edu 1

Special thanks to Professors Bruce Sherrick, Todd Kuethe, & Gary Schnitkey!! TIAA-CREF Center for Farmland Research Advancing Farmland Markets through Research and Information Research Unit at University of Illinois, Department of Ag and Consumer Economics, sponsored by TIAA-CREF � Joint activities with farmdoc. edu and farmdocdaily � Creates focus on Farmland Research and Decision Tools � Long history with farmland stakeholders � C o n t e x t ISPFMRA , ASPFMRA NCREIF FBFM IDOR Lending Communities http: //f armlan d. illino is. edu Goals: improve accuracy and understanding of asset class, and to provide unbiased research and useful tools for those involved with farmland investments.

Characteristics of Farmland as an Investment • Relatively expensive – High barriers to entry • Relatively illiquid – Takes a while to get in or out • Relatively difficult to estimate value – No standardized market 3

Very low “turnover” – less than 1% 4

Characteristics of Farmland as an Investment • Very location specific – But tractors are fast now… • Keeps up with inflation pretty well • Doesn’t correlate with stock market returns very well • A great place to invest a lot of money – IF YOU ALREADY HAVE A LOT OF MONEY… • Management is specialized; yet MUCH simpler than some alternatives • Outstanding total returns compared to many common alternative investments 5 • A major change since “Great Recession”!!!!!!

Farmland: Asset Returns Source: http: //farmland. illinois. edu/content/events-and-news 6

Farmland: Performance as an Asset C o n t e x t (annual holding periods, 1970 -2014)

Characteristics of Farmland as an Investment • Doesn’t “pay for itself” – Never has – DCR = Debt Coverage Ratio stays around 58 to 62% • Compared to other investments – Owners often have a very long holding period, sometime multi-generational – Owners have a significant non-economic attachment 8

Characteristics of Farmland as an Investment • Return consists of two components – Cash return (often the smaller part) – Appreciation (often the bigger part) • The % cash return often is approximately equal to the yield on the Ten Year T-Note • The appreciation varies widely year to year • Over time it appears… – As investors begin to expect appreciation, – They’re willing to accept lower cash return 9

Return Components (%/year, IL) 25, 00% C o n t e x t Capital Gain (i. e. appreciation) 20, 00% Owner Income (i. e. net rent) 15, 00% 15% 10, 00% 10% 5% 5, 00% 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1990 -5, 00% 1993 1992 1991 0, 00% 1990 2013 10

1970 1990 2010 11

1970 1990 2010 12

Cash rents and land values move together 1970 2016 http: //farmdocdaily. illinois. edu/2016/08/2016 -cash-rents-land-values-illinois. html 13

Major players in the farmland market • Farmers – Often retired farmers – Owner/operator gets “both sides” of income stream so can pay more – Production ag in Midwest is enormously scaleable • 14

Major players in the farmland market • Institutional Investors – Often attracted by excellent total returns over time – Often farmland is a very small part of a large portfolio in order to achieve diversification • Private – Often have some prior connection with farming – Cash on cash returns better than CDs, and effective inflation hedge over long periods 15

What factors drive land values? • EXPECTATIONS re: Supply and Demand – Markets anticipate – Markets over-react – One production cycle per year for many crops – GLOBAL SUPPLY & DEMAND 16

What factors drive land values? • Supply factors – Turnover – available supply matters, not total suply; often < 1% changes hands per year – Rates of return on alternative investments – Tax laws – estate, capital gains, and gift tax provisions – Compared to non-ag businesses, supply shocks (like drought or disease) are often • a) severe, but are also • b) relatively short-lived 17

What factors drive land values? • Demand factors for ag products population, incomes, tastes and preferences, etc. – Ag products are a) food b) raw materials e ar s ift from which food is made, or c) raw h s d low n a ys material from which renewable fuel is m l l e a D su u made • Prices of the commodities raised – Corn: 4 uses = 40%, 35%, 10% – Beans: 3 uses = 47%, 45%, 8% • Cash rents (investors), producer profitability (farmers) 18

Why does farmland have value? 157 There’s a huge problem out there… n pe ew • • peo p inu World population is currently 7. 51 billion. te!! le It’s grown by about 82 million in past year. d. Aunew Paris ring t (That’s 226, 204 net new people per day!) presentahis tion! rm ! • At that rate, we’ll add a BILLION new mouths in about 13 years! #1 = China: 1. 38 billion #2 = India: 1. 34 billion #3 = United States: 326. 3 million 130 years 19

Malthus was wrong! "The power of population is indefinitely greater than the power in the earth to produce subsistence for man" I was wrong! 20

Where have we been? 1970 2017 21

Aggregate US Debt Ratios, US Ag Sector 2014 1970 For institutional investor use only. Not for use with or distribution to the public. 22

The % cash return often is approximately equal to the yield on the Ten Year T-Note

Dashed red line = capitalized values i. e. , cash return T-Bill rate Solid blue line = IL farmland prices

Where are we now? Source: https: //www. chicagofed. org/publications/agletter/2015 -2019/may-2017 25

Net farm income reflects income from production in the current year, whether or not sold within the calendar year, and is a measure of the increase in wealth from production. 26

Highly variable returns Source: http: //farmdocdaily. illinois. edu/2017/02/2017 -projected-incomes-on-illinois-grain-farms. html 27

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Is this like 1980? 29

Is this like 1980? Consensus is “No” 30

Is there a Bubble? In some areas of the Midwest, if you bought a farm more than seven years ago land values could drop 40% and the farm would still be worth more than you paid! INTEREST RATES 1980 Common loan terms = Borrow 80% of value at 15% interest rate on 40 yr/Variable (!) 2014 Common loan terms = Borrow 60% or less at 4 to 7% interest rate on 20 yr/Fixed Many farmers have been converting variable rate real estate loans to fixed rate loans. 31

Crop Insurance matters: Percent Acres Insured, U. S. Farmers/owners can insure not only yield, but also REVENUE: a game changer in the risk profile of production agriculture

• • • Looking forward Increasing population Volatility in commodity prices Inelastic demand for food Global climate change? Water issues, even in the “humid Midwest” 33

World’s supply of arable land is: a) Limited b) Possibly shrinking 34

Risks • Major changes re: ethanol and energy • Major changes in cropping patterns • Increase in interest rates – Consensus is that we’ll get that sooner or later – Last 6 years: “ 6 to 18 months to the rate hike” • That will do two things – Raise the cost to borrow money to buy land – Imply an increase in rate of return on other investments • So some money that has stayed in land will get moved to other investments 35

Great Resources re: farmland • University of Illinois Farmdoc website – http: //www. farmdoc. illinois. edu/ • Farmdoc Daily website – http: //farmdocdaily. illinois. edu/ • TIAA-CREF Center for Farmland Research – http: //farmland. illinois. edu/ 36

Thank you for your time! 37