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Factors Affecting Farmland Markets. The Changing Landscape of Ag Banking in Illinois IBA Ag Banking Conference Sept. 7-8, 2006 – Springfield Illinois. Bruce J. Sherrick University of Illinois. visit us at: Outline:. Background, Ag B/S and Lender Shares

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Factors Affecting Farmland Markets

The Changing Landscape of Ag Banking in IllinoisIBA Ag Banking ConferenceSept. 7-8, 2006 – Springfield Illinois

Bruce J. Sherrick University of Illinois

visit us at:

  • Background, Ag B/S and Lender Shares
  • Valuation and Income info – how linked?
  • Investment performance of farmland
  • Illinois land market updated survey information: who, why, what and how…
  • Contemporary issues for farmland markets
ag sector balance sheet keys
Ag Sector Balance Sheet - keys
  • Farmland represents 83.5% of farm assets and about 56% of farm debt (8/2006)
  • Low aggregate leverage relative to other sectors (currently approx. 13.1% ag. D/A and shrinking slowly)
  • Some shifting among debt providers, little shift between debt and equity
  • Active equity market absence
history repeated again
History repeated… again

“We have two great sources of profit in farming: first, rise in the value of the land; and second, profit on the production of farm crops. The first has been the chief source.”

“Illinois farmland will only experience about 4-5% average appreciation in 2005” -Bruce Sherrick, 2004

- George Morrow, 1886

“I was wrong. Again.” -Bruce Sherrick, 2004, 2005, 2006, etc.

illinois farmland markets
Illinois Farmland Markets…

cont. compounded increase of 5.7% per year 1970-2006

factors affecting farmland values
Factors affecting farmland values
  • Thin Markets – highly inelastic local demand
  • Performance relative to other investments
  • Composition of returns changing (farming, vs. recreation, development and 1031 influence)
  • Recent income levels, interest rates
  • Changing lease markets, absentee ownership
farmland turnover illinois
Farmland Turnover -- Illinois
  • Thin – average of under 1% annual sales, arm’s length, available competitively, actual farmland intended usage
    • limited option to expand with contiguous/proximate land through purchase
    • increases importance of lease markets in value determination
    • “lumpy” land sales relative to leasing

…leads to some exceptional localized events and difficulty in assessing “average” value

history of farmland returns as investment
History of Farmland Returns as Investment
  • Long progression of capital gains, one period of losses – data period important when assessing performance
  • Capital Gains Rates (annual geometric):
    • 1950-2000: 5.6%
    • 1970-2000: 5.7%
    • 1980-2000: 2.0%
    • 1970-2006 Q2: 5.7% (est.)
    • 2004-2005 Illinois average increase 28% (USDA)
    • 2005-2006 Illinois forecast increase 15% (USDA)
  • Plus: current income in 3-5% range from rent/operations
farmland as an investment
Farmland as an investment
  • Academic research shows:
    • Low systematic risk – behaves much like a fixed income financial asset
    • High or adequate returns given risk

counter to premise of many debates on “low returns”

    • Role as inflation hedge (positive correlation)
    • Market friction caveats, explanations
  • Portfolio models favor inclusion of farmland in investment portfolios – to greater degree than observed in reality
so what drives the farmland market
So what drives the Farmland market?
  • Within Illinois, considerable risk differences, esp. North to South
  • Risk-adjustment within class?
    • cash rent series by county (FBFM)
    • cash gross returns by county (farmdoc)
    • test fraction of expected return paid in form of cash rent
  • Strong evidence of within-class response
farmland as an investment1
Farmland as an investment
  • Traditional Capitalization arguments: considerable difference in rent and productivity lead to…..
farmland as an investment2
Farmland as an investment
  • Nothing much in aggregate….Swamped by other effects
  • So, U of I Study of factors influencing farmland values finds following significant items (Huang, Sherrick, Miller, Gomez, 2006)
    • Size of tract (-)
    • SPR (+++)
    • Distance to Chicago (++)
    • Distance to metro location (++)
    • Ruralness indicators (--)
    • CPI (++)
    • Population (+)
    • Income (+)
    • Livestock activities (+/-)


2005-2006 Land Value Trends

attributes of buyers include
Attributes of buyers include …
  • 56% of buyers used 1031 exchange funds - 2005
    • up from 48% year prior, down first half of 2006.
  • 62% of buyers did not use debt capital
    • increase of 10% from year prior
contemporary issues
Contemporary Issues:
  • Role of government (payments average 24% of income, 32% pre-, regulation, and changing program design and emphasis)
  • Energy Bill or Farm Bill? Food v. Farm programs?
  • Property Tax Updates
  • Term Structure impacts
  • What’s on the “Horizon” with competition
  • Basel II and other badly kept secrets
questions comments


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