Is There a Change Ahead for Commodity Prices?

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1 February 11, 2014 Powerful Insight for LandOwners Vol. 35 Iss. 3 USDA boosts its price projections for major crops in its latest update of supply and demand projections. USDA lifted its projected season-average onfarm corn price range by 10 to $4.20 to $4.80 per bushel. The agency made the increase as it decreased projected carryover supplies by 150 million bu. to billion bushels. That compares to a carryover of 821 million bu. for the crop year. The cut was due to a boost in projected exports. USDA increased its season-average on-farm soybean price range by 20 to $11.95 to $13.45 per bushel. The rise came despite keeping its carryover unchanged at 150 million bu., up slightly from 141 million bu. the prior year. The agency tightened its season-average onfarm wheat price range by 10 a bushel to $6.65 to $6.95. The increase came as USDA lowered its carryover estimate by 50 million bushels. USDA increased its projected season-average onfarm cotton price range by 1 to 2 to 74 to 78. The boost came even as it left its carryover projection unchanged at 3 million bales. Your last chance to attend a winter Pro Farmer Profit Briefing Seminar is Feb in Peoria, Illinois. Call for information. Is There a Change Ahead for Commodity Prices? The upswing in commodity prices in the early 2000s due to the downgrade of the U.S. dollar launched the upturn in farmland prices during that decade. Prices crashed in late 2008 on the credit freeze, but quickly rebounded as the federal government flooded the financial system with cash. Farmland values surged as well. The flood of cash eventually moved away from Goldman Sachs Commodity Index Monthly Futures Barcharts.com Long-term Uptrend Line Downtrend LIne Is There a Stock Market Bubble? Whether the stock market is merely undergoing a much-needed correction in a longer-term bull run or the recent setback is the start of a much deeper setback is the subject of intense discussions in the financial media. We freely admit that we don t know and prefer owning farmland for its income-producing properties, its long-term capital appreciation potential and preservation of wealth in either inflationary or deflationary times. But the chart below certainly gave us pause as we look at the recent sell-off in the stock market. The chart is compiled by Dr. Mark Dotzour, chief economist with the Real Estate Center at Texas Dr. Mark Dotzour, Real Estate Center, Texas A&M University commodities to equities as commodity inflation waned. The Goldman Sachs Commodity Index shows the downtrend in commodity prices that has resulted. Farmland values have stabilized, even moving lower in some areas, as well. The index is now at a critical point. It has found important support at the 600 area since breaking the uptrend line in the spring of But the index continues to run into selling pressure on each test of the downtrend line that has pressed the index lower since the 2008 peak. Simply trending sideways above the 600 support area would break that downtrend. Upon doing so, trends would favor rallies rather than selloffs. That would tend to support farmland values, as well, along with the long-term uptrend line providing support for farmland values over the broad long term. A&M University. Speaking at the recent Land Investment Expo in Des Moines, Dotzour pointed out the amount of stocks bought on margin had reached a historic high. Twice previously when the margin debt soared and peaked at record highs, the stock market plunged dramatically over the following two years. The first spike in margin debt occurred in March of The Dow was at 11,234 at that peak, says Dotzour. It dropped to 9,106 a year later and 7,415 by March The next peak came in July The Dow was at 14,021 then. A year later it was at 10,827 and by July 2009 it was at 8,087. The latest data available is through December, and it shows margin debt at new highs. There is just too much money chasing things, giving us asset inflation rather than price inflation, says Dotzour. The risk is in those asset classes carrying high leverage. It appears the stock market qualifies. Does farmland? As a whole, agriculture does not carry a heavy debt load. This suggests farmland values can correct without triggering heavy forced selling, which would accelerate a downturn in land values.

2 North Dakota Land Pros Find 17% Rise in Cropland Values The value of North Dakota cropland rose 17% in 2013, according to a survey of farm managers, real estate professionals and rural appraisers. The survey, the 17th annual review conducted by the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers (ASFMRA), finds the chapter s state index of cropland values reached $2,947 an acre. The index gives equal weight to all 56 reporting counties and/or market areas. The 17% annual increase reported at the end of 2013 is down from the 39% surge found a year earlier. On a regional basis (see Outlook Page 2), the Red River Valley had the lowest change at +11%, while the northeastern counties had the largest change at +24%. These two regions posted gains of 32% and 45%, respectively, in Investment Fund Index Sees Strong Returns from Cropland Fund managers increasingly talk about diversifying into farmland ownership. Recent data from an organization that monitors farmland returns for its institutional investment community will no doubt pique their interest. The National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index showed the total return on the group s 546 investment-grade properties was 9.26% during the fourth quarter of That gain was comprised of 5.02% appreciation and 4.24% income. This was above the third quarter s 2.94% total return, but below the fourth quarter 2012 s 9.56% total return. The trailing four-quarter (annual) total return dropped slightly from 21.25% to 20.91% in the fourth quarter. That is the second highest total return over a four-quarter period since fourth quarter of Christopher Jay, chairman of the NCREIF Farmland Committee and director of financial analysis with Prudential Agricultural Investments, noted: The year Regional Returns on Investment Fund Properties North Dakota Cropland Trend State Price Index per Acre North Dakota Chapter, ASFMRA Index = $2, % had strong performance in all regions of the country and in many commodity sectors, but this was especially true for permanent crops in the Pacific West, which were led by almond and pistachio properties. The 2013 total return marks the third consecutive year with returns over 15%. Eight of the past ten years have also seen returns of more than 15% on a total farmland basis. Permanent cropland outperformed annual cropland with a 16.85% total return versus annual cropland s 5.63%. Permanent cropland s 16.85% return consisted of 6.19% appreciation and 10.66% income. This was permanent cropland s best performance since the fourth quarter of The index consists of 400 annual cropland properties and 146 permanent farmland properties. It includes 175 properties in the Corn Belt, 124 in the Pacific West, 66 in the Delta States, 54 in the Pacific Northwest, 45 in the Mountain States, 33 in the Lake States, 25 in the Southern Plains and 23 in the Southeast. National Council of Real Estate Investment Fiduciaries LandOwner is published twice a month. Copyright 2014 by Professional Farmers of America, Inc., 6612 Chancellor Drive, Cedar Falls, Iowa Periodicals postage paid at Cedar Falls, Iowa. Postmaster: Send address changes to: LandOwner, P.O. Box 36, Cedar Falls, Iowa Senior Vice President, Chuck Roth Editor, Mike Walsten Publisher, Chip Flory Markets Editor, Brian Grete Editorial Phone: landowner@profarmer.com ISSN number: Editorial correspondence: P.O. Box 36, Cedar Falls, IA Subscription services phone: Subscription: $249 per year LANDOWNER 2 /February 11, 2014

3 Lender Data Reflects Low Leverage on Land Buys New data from Farm Credit Services of America (FCSAmerica) indicates land buyers are better prepared for a setback in land values than they were in the late 1970s, just prior to the agriculture recession of the 1980s. Speaking at the recent Land Investment Expo in Des Moines, Jim Knuth, senior vice president for the large Omaha-based ag lender, said the average loan-to-collateral value on its farmland loans made in 2013 is 43%. That is down from 46% on its 2012 loans and down from 54% on its 2009 loans. This data is from $10.5 billion in real estate transactions that we have handled over our four-state service area, he notes. (FCSAmerica covers Iowa, Nebraska, South Dakota and Wyoming.) In addition to the relatively low loan-to-value ratio, 75% of the debt is locked in interest rates are fixed, he adds. In answer to the question: Can $4.50 corn service the debt on this high-priced ground? the answer is Yes because the debt load is low, he observes. Agricultural borrowers have been very disciplined. The low debt load will help support loans and cash flows even in the event of a declining farm ground value scenario. Additionally, many borrowers could re-amortize their existing real estate debt to lower their payments. Just as important as the low loan-to-value ratio is the fact interest rates are fixed on 75% of the mortgage. Why? Much of the financing on land purchases in the 1970s was done with adjustable-rate mortgages. When interest rates spiked in the early 1980s, those adjustable-rate mortgages re-set at much higher levels sometimes doubling into the upper-teens and lower-twenties. That alone made debt service extremely difficult. Meanwhile commodity prices plunged, dropping farm incomes by 40% and more. The combination of the two made debt service nearly impossible and the selloff in land values was on. Other key data: FCSAmerica monitors the average dollars-per-csr (Corn Suitability Rating) ratio across the state. (See Jan. 23, 2014 LandOwner for further discus- Average $/CSR Point by Region 2013 Key FCSAmerica Average Real Estate Data Farm Credit Services of America sion of the CSR.) The sales used in this measure are unimproved farms that are at least 85% tillable and at least 40 acres in size. The measure equaled $89.50 at the end of 2010, $ in 2011, and $ in 2012 up 63% in three years. The ratio peaked in the second quarter of 2013 at $ and finished 2013 at $ That is a decline of 5% from the high posted in the second quarter and a dip of 2% from the end of The map at lower left shows the dollars-per-csr point ratio for each of the state s nine crop districts at the end of The northwest district lists the highest ratio at $ That district tends to carry a lower CSR due to the nature of the area s soils. But yields can be just as strong as in higher CSR areas found in central Iowa. That district has seen exceptionally strong demand for farmland the past few years with some of the highest prices paid in the state. Farmland is extremely tightly held in that area. The presence of numerous large livestock enterprises adds to demand as producers seek control of feed supplies and land for manure disposal. According to FCSAmerica data, farmers accounted for 81% of all farmland buyers in This is up from 79% in 2012 and 73% in both 2010 and Local investors were 10% of the market in 2013 down from 11% in 2012 and 13% in Out-of-area investors were 7% of the market in 2013, down from 11% in 2011 and 13% in Other buyers and 1031 buyers comprised 1% each of the market. Local capital and local competition has been driving the market, observes Knuth. Fifty-four percent of farm sales were conducted by auction in 2013, says Knuth. That s up from 50% in 2012 and 29% in The number of no sales at auction rose in 2013 to 152 compared to 118 in The number of public auctions declined 25% to 30% in 2013 versus 2012, consistent with the decline in sales offerings in The number of no sales at auctions was 6.7% in 2013, compared to 3% in 2012, Knuth states. LANDOWNER 3 / February 11, 2014

4 INDIANA: BENTON COUNTY JANUARY 16: 241 acres northeast of Fowler; 169 acres tillable; corn PI 161 on cropland; farmstead with 2 grain bins; $7,759 per acre. Jim Hayworth, Schrader Real Estate & Auction Co., Inc., Monticello, KANSAS: BUTLER COUNTY JANUARY 16: 299 acres east of Leon; native Flint Hills pasture; 3 ponds; $2,250 per acre. Jeremy Sundgren, Sundgren Realty, El Dorado, WYOMING: NIOBRARA CO. JANUARY PRIVATE TREATY: 21,230 total acres 6 miles west of Lance Creek. The Crockett Ranch consisting of 15,921 deeded acres, 640 acres state lease, 4,349 acres BLM lease, 320 acres leased privately; $3,980,000 total. Blair Newman, Newman Realty, Torrington, NEBRASKA: POLK COUNTY JANUARY 14: 318 acres southwest of Columbus. Tract 1: 160 acres 9 miles west of Osceola; 141 certified irrigated acres; 149 acres total cropland; pump and motor; pivot not included; $1,405,000 total or about $8,781 per acre. Tract 2: 158 acres 2 miles south of Stromsburg; 146 certified irrigated acres; pump and gear, power unit and pivot not included; $1,460,000 total or about $9,241 per acre. Mike Polk, Agri Affiliates, Inc., Kearney, KANSAS: RUSH COUNTY DECEMBER 3: 640 acres southwest of Liebenthal. Tract 1: 170 acres; 139 acres cropland; $2,000 per acre. Tract 2: 160 acres; 114 acres cropland; $2,400 per acre. Tract 3: 160 acres; 155 acres cropland; $2,400 per acre. Tract 4: 150 acres; 148 acres cropland; $2,200 per acre. Tract 5: 10 acres; farmstead; $290,000 total. Donald Hazlett, Farm & Ranch Realty, Inc., Colby, ILLINOIS: MACON COUNTY NOVEMBER 22: 80 acres east of Neponset; 73 acres tillable; PI (147 maximum); $9,000 per acre. Rediger Auction Service, Wyanet, $ Recent sales reported to... Here s a listing of recent sales reported to us by real estate brokers and auctioneers across the country. If you have recent sales you d like to share, call us at or us at landowner@profarmer.com. ILLINOIS: MCLEAN COUNTY FEBRUARY 4: 274 acres between Merna and Cooksville. Tracts 1 & 2: 122 acres; 116 acres tillable; PI (Bulletin 811 maximum PI rating is 147); $13,050 per acre. Tracts 3 & 4: 151 acres; 151 acres tillable; PI 132.1; $10,200 per acre. Kevin Meiss, Soy Capital Ag Services, Bloomington, IOWA: JASPER COUNTY JANUARY 31: 80 acres southeast of Mitchellville; 79.5 acres tillable; CSR 89.7 (64.1 county average); $13,000 per acre. John and Kathy Van Zee, Farmers National Company, Mitchellville, IOWA: HENRY & JEFFERSON COUNTIES JANUARY 30: 139 acres southwest of Wayland. Tract 1: 43 acres; 35 acres tillable; CSR 66.8 (60.4 county average); includes easement for owner and adjacent landower to have access to Tract 2; $5,900 per acre. Tract 2: 96 acres; 67 acres tillable, 13 acres of which are in CRP expiring in 2017; CSR 73.8 (56.6 county average); $3,400 per acre. Steffes Group, Inc., Mt. Pleasant, INDIANA: WHITLEY COUNTY JANUARY 29: 121 acres 4.5 miles west of Columbia City; 99 acres tillable; balance wooded; $2,806 per acre. Arden Schrader, Schrader Real Estate & Auction Co., Inc., Columbia City, COLORADO: LOGAN COUNTY JANUARY 28: 160 acres 15.5 miles south of Sterling; dryland acres; $1,795 per dryland acre. Marc Reck, Reck Agri Realty & Auction, Sterling, NEBRASKA: CUSTER COUNTY JANUARY 27: 320 acres 9 miles west of Merna; acres cropland; 270 acres irrigated, 44.6 acres dryland; 2 pivots plus pumps and wells; SRPG 63.1; $7,000 per acre. Dave Davis and Jim Eberle, Farmers National Company, Broken Bow, SOUTH DAKOTA: LINCOLN COUNTY JANUARY 24: 151 acres southeast of Lennox; acres cropland; PI 75.3; includes $115-an-acre in fall fertilizer and tillage which passes directly to the buyer at no additional cost; $6,300 per acre. Chuck Sutton Auctioneer & Land Broker, Sioux Falls, IOWA: EMMET COUNTY JANUARY 22: 147 acres 2 miles north of Esterville; 140 acres tillable; CSR 74.2 (66.8 county average); $8,700 per acre. Jon Hjelm, The Acre Co., Spencer, INDIANA: CARROLL COUNTY JANUARY 22: 120 acres 4 miles southeast of Idaville. Tract 1: 70 acres; mostly all tillable; corn PI 148.7; $8,746 per acre. Tract 2: 27 acres; mostly all tillable; $8,722 per acre. Tract 3: 23 acres; mostly all wooded; $2,696 per acre. A.J. Jordan and Larry Jordan, Halerman Real Estate Services, Peru, ILLINOIS: HENRY COUNTY JANUARY 22: 78.6 acres 6 miles south of Geneseo; 76 acres tillable; PI (147 maximum): $10,100 per acre. Edward Kiefer, Hertz Real Estate Services, Geneseo, LANDOWNER 4 / February 11, 2014

5 Outlook Provided by Pro Farmer EQUITIES S&P 500 Index The S&P 500 Index started 2014 with a push to an all-time high. As economic uncertainty reentered the market and a new Fed chairwoman was sworn in, profit-taking turned aggressive. Stock market watching economic situation closely 1, , STOCK MARKET: LaSalle Economics President Dr. Vince Malanga says the Federal Reserve Board s position that the U.S. and global economies are healing is backed up by U.S. real 4th-qtr. GDP growth of 3.2% following summer growth of 4.1%. Normally, that would set the stage for a warm welcome to Janet Yellen, the new Federal Reserve chairwoman. Despite a skeptical investment climate, the long-term trend in equities is still higher. Fundamental trends Malanga warns, however, History shows financial markets have not been kind to incoming Fed chairmen. He says we should anticipate downward revisions to second-half 2013 economic growth estimates and for similar economic growth (still slow) in If right, he says the markets may begin to question the wisdom of the Fed s decision to scale back asset purchases. CORN Weekly Corn Futures A close above $4.50 would signal at least a short-term low has been posted. But bulls need closes above $5.51 and the downtrend from the all-time high to signal a potential trend reversal. Key support is at the long-term uptrend and the January low at $4.06 1/4. Violation of the January low would signal corn futures are going to test the waters below $4.00. $4.50 $5.51 Corn demand is good $4.06 1/4 Corn: Domestically, ethanol plants are fired up and livestock and dairy producers are adding pounds to most carcasses and pushing for more pounds of milk per cow. Cold temps are also increasing animal intake just to maintain production. Internationally, importers are coming to the U.S. for feed supplies with excellent Fundamental trends export sales of old-crop corn in the week ended Jan. 30 at just over 1.7 million metric tons (MMT). And while China is rejecting/cancelling corn purchases due to a non-approved GMO trait, much of that corn is still finding a home in other Asian countries, such as South Korea. LANDOWNER February 11, 2014 / Outlook page 1

6 End-of-year North Dakota Dryland Cropland Values Below are the region-by-region and county-by-county land values for North Dakota dryland cropland as of the end of The information is supplied by 34 land appraisers and farm management professionals responding to the 17th annual land values survey conducted by the North Dakota chapter of the American Society of Farm Managers and Rural Appraisers. (More on Page 2.) The survey also includes pasture values as well as cash rents, which are not included due to space limitations. The survey is considered a snapshot as it looks only at end-of-year prices and not at market conditions throughout the year. Region 1 Region 2 Region 3 Region 4 Region 5 LANDOWNER February 11, 2014 / Outlook page 2