Dale Lattz Farmdoc Research Associate at the University of Illinois College of ACES
Outlook for Illinois Land Prices and Cash Rents Evolving Dynamics Dale Lattz University of Illinois dlattz@illinois.edu
Topics 1. Trends in farmland prices 2. Past, current, and projected farm returns 3. Effect of lower returns on cash rents
Illinois Land Values and Cash Rents 2006: $3,640 2014: $7,700 2015: $7,650 2017: $7,450
2017 Illinois Farmland Values & Lease Trends Understanding Our Farmland Categories Using the Productivity Index from the University of Illinois (Bulletin 811). Excellent Productivity 147 to 133 Good Productivity 132 to 117 Average Productivity 116 to 100 Fair Productivity Less than 100 Recreational Tracts Transitional Tracts
Understanding Farmland Categories Excellent Expected corn yields over 190 bpa Good Expected corn yields between 170 to 190 bpa Average Expected corn yields between 150 to 170 bpa Fair Expected corn yields less than 150 bpa
2016 Excellent Quality Farmland Mid Range Land Value Comments Region 1 $10,500 Higher supply of land south of Illinois River led to more decrease there. Some new 1031 exchange money in the market supporting values. Region 2 $11,500 Farmers still the main land buyers. Tight supply. 9 sales still over $12,000/acre. Region 3 $11,000 Low volume with sellers resisting lower prices. Location has become much more important to high sales prices. Region 4 $10,750 Wider range of prices than 2015. Bare, square, high percentagetillable bringing a premium. Lowvolume. Region 5 $10,325 Prices down 5-8%. Same notes as Region 4 on volume and price for premium tracts. Especially strong in Champaign & Douglas Counties. Region 6 $10,525 Down 8-9%. Larger disparity between low priced tracts and high priced sales (Over $4,100/ac). Location important. Region 7 $12,200 This region sustained the high quality land values better than any other region. Evidenced by 888 ac. Auction -March Region 8 -- 17 Region 9 $10,250 Region 10 -- $10,880 (average)
2016 Good Quality Farmland Mid Range Land Value Comments Region 1 $8,200 Prices down ~7%, most found in Will County area. Prices higher in the south and west side of this Region. Region 2 $8,000 Median sales price down 11%. Mostly farmer buyers but investors were picking up opportunities. Wide price range. Region 3 $8,250 Less liquidity than the highest quality farmland. Field shape & percent tillable really influenced price negatively. Region 4 $8,750 Higher volume than 2015. Prices declined early and leveled out later. Region 5 $7,950 Sought out by investors and farmers when excellent land seemed not available. Price down~11%. Volume -20%. Region 6 $9,425 Better quality good farms sold in 2016 vs 2015. Longer marketing timeframe to move most tracts. Region 7 $8,755 Several option or easement payments being 1031 ed into farmland purchases by local landowners. Region 8 $10,700 The best soils in this region. This average actually rose likely as compared to 2015. Region 9 $8,800 Very similar price to 2015. Region 10 $8,000 Similar price average to 2015-or a little higher. Wide range in price per acre.
Farmland Value Changes Farmland values peaked in 2013 Excellent about 14% drop from the peak Good about 10% drop from the peak Average about 17% drop from the peak
AgLetter Chicago FED, May 2017
Farmland Values Two main factors Income stream associated with farmland Cash rent income Adjustments for ownership costs Discount rates Interest rates Other factors
10-year Treasury Note Yields Nov 7, 2016: 1.83% Dec 1, 2016: 2.45%
Land Values Price have risen because of Increasing returns (until last few years) Lower interest rate CCCCCCCCCCCCCCCCCCCCCC VVVVVVVVVV = CCCCCCCC RRRRRRRR 1111 yyyyyyyy TTTTTTTTTTTTTTTT rrrrrrrr
Capitalized Value of an Asset Discount rate, r Annual income generated by asset, I Capitalized Value or Price, P PP = II rr Example: $220 cash rent farm (avg in IL) Discount rate (r) 2% 3% 4% 5% Land Value $11,000 $7,333 $5,500 $4,400
Illinois Farmland Price and Land Values
Reasons for lower land values Increasing interest rates could increase discount rate factor in capitalizing land values Commodity prices remain relatively low resulting in continued modest returns to farmland
Reasons for stabilized land values Lower farm returns and increasing interest rates already factored in to lower land values Capitalized value of farmland above current farmland values Relatively financially strong ag sector
Net Farm Income on Grain Farms
Operator and Farmland Returns Per Acre Operator and Farmland Returns - Central Illinois 2013 2014 2015 2016 2017F Gross Revenue $891 $791 $749 $762 $675 2017F - 2013 change -$216 Total direct costs $321 $316 $304 $287 $256 Total power costs $119 $125 $116 $113 $106 Total overhead costs $56 $61 $62 $64 $63 Total non-land costs $496 $502 $482 $464 $425 Operator and land return $395 $289 $267 $298 $250 -$65 -$13 $7 -$71 -$145 Source: University of Illinois 2017F - Forecast Rotation: 52% C / 48% SB, High Productivity Farmland
Why 2016 Income Higher? Good corn soybean yields Relatively good soybean prices Reductions in non-land costs 2015 ARC payments received in 2016 Inventory gain: Corn: $3.60 end-of-year 2015 inventory price, $3.65 old crop price Soybeans: $8.60 end-of-year 2015 inventory price, $9.40 old crop price
Financially What Is Happening Strong financial farms at the end of 2012 Since 2012, many farms are eroding working capital Grain inventories and prepaid expense down Operating loan balances up Most farm have strong equity and solvency Some farms have difficulty showing positive cash flow
Market Year Average Prices and Forecasts ----------------------- Period --------------------- 75-05 06-13 14 15 16P 17P Corn ($/bu.) 2.33 4.70 3.70 3.61 3.35 3.30 Soybeans ($/bu.) 5.95 10.91 10.10 8.95 9.50 9.40 Wheat ($/bu.) 3.25 6.25 5.99 4.89 3.89 4.80 Projection for 2016 and 2017 are WASDE projections, Fall 2017 bids (east-central Illinois, July 14): $3.60 corn $9.70 soybeans
2016 15 billion production = 86.8 million x 174.4 bu/acre 2016 4.2 billion production = 83.0 million x 51.4 bu/acre
Monthly Corn Prices, U.S.
Professional Farm Managers Leases - 2016 48% Crop share leases 27% Traditional 12% Traditional with supplement cash rents 9% Traditional with other adjustments 47% Cash rent leases 26% fixed 21% variable 8% Other (custom farming arrangements)
Determining a Cash Rental Rate Cash rent market approach Net return to operator and land Landowner s adjusted net-share rent Percent of gross returns Landowner s ownership cost Percent of land value Dollars per bushel of production Fixed bushel rent
Average Cash Rents in Illinois Average Cash Rent in Illinois, 1976 to 2016 $250 $230 $210 $190 $170 $150 $130 $110 $90 $70 $50 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: USDA-NASS
Average Cash Rents in Illinois Cash Rent Dollar Percent Year Per Acre Change Change 2007 $141 2008 $163 $22 15.6% 2009 $163 $0 0.0% 2010 $169 $6 3.7% 2011 $183 $14 8.3% 2012 $212 $29 15.8% 2013 $223 $11 5.2% 2014 $234 $11 4.9% 2015 $228 -$6-2.6% 2016 $221 -$7-3.1% Source: USDA NASS
Average Illinois Cash Rents by County See farmdocdaily Sept., 13, 2016
Average and Professionally Managed Farmland, Illinois
Mid 1/3 Average Excellent Farmland Over 190 bushels per acre, professionally managed farmland Cash Rent Dollar Percent Year Per Acre Change Change 2008 $241 2009 $267 $26 10.8% 2010 $268 $1 0.4% 2011 $319 $51 19.0% 2012 $379 $60 18.8% 2013 $396 $17 4.5% 2014 $375 -$21-5.3% 2015 $350 -$25-6.7% 2016 $325 -$25-7.1% 2017 $300 -$25-7.7% Source: Illinois Society of Professional Farm Managers Rural Appraisers
Mid 1/3 Average Good Farmland 170 to 190 bushels per acre, professionally managed farmland Cash Rent Dollar Percent Year Per Acre Change Change 2008 $207 2009 $221 $14 6.8% 2010 $231 $10 4.5% 2011 $271 $40 17.3% 2012 $331 $60 22.1% 2013 $339 $8 2.4% 2014 $323 -$16-4.7% 2015 $295 -$28-8.7% 2016 $283 -$12-4.1% 2017 $260 -$23-8.1% Source: Illinois Society of Professional Farm Managers Rural Appraisers
Cash Rent by Land Productivity Professionally Managed Farmland Source: Illinois Society of Professional Farm Managers and Rural Appraisers
Determining a Cash Rental Rate Cash rent market approach Net return to operator and land Landowner s adjusted net-share rent Percent of gross returns
Net Return to Operator and Land 2017 Corn and Soybean Budgets Central Illinois - High Soil Productivity Corn after Soybeans Soybeans after Corn Yield per Acre 203 61 Price per Bushel $3.70 $9.70 Crop Revenue $751 $592 ARC - PLC $0 $0 Crop Insurance $0 $0 Gross Revenue $751 $592 Total non-land costs $521 $319 Operator and land return $230 $273 Source: University of Illinois 50/50 crop rotation=$251
2018 Operator and Land Returns Estimates Expected Price Operator and Land Return Corn Soybean Central- Central- Price Price North High Low South $/bu $/bu Operator and Land Return ($/acre) 4.20 10.00 303 304 253 130 4.00 9.60 271 271 223 103 3.70 9.00 237 237 192 80 3.40 8.15 205 206 165 59 3.10 7.50 175 176 138 39 Bu/acre Bu/acre Bu/acre Bu/acre Expected corn yield 200 203 187 165 Expected bean yield 63 61 58 48 $/acre $/acre $/acre $/acre 2017 Est. Cash Rent $250 $270 $225 $160
Determining a Cash Rental Rate Cash rent market approach Net return to operator and land Landowner s adjusted net-share rent Percent of gross returns
Landlord s Adjusted Net-Share Rent Central Central Year Northern High SPR Low SPR Southern 2007 $266 $271 $253 $162 2008 $283 $288 $267 $205 2009 $191 $207 $201 $172 2010 $288 $280 $249 $222 2011 $367 $343 $303 $230 2012 $394 $371 $344 $248 2013 $296 $279 $253 $233 2014 $257 $264 $246 $220 2015 $223 $204 $188 $167 2016 $254 $254 $229 $205 2007-2016 avg 2007-2016 high 2007-2016 low 2000-2006 avg 2000-2016 avg $282 $276 $253 $206 $394 $371 $344 $248 $191 $204 $188 $162 $142 $147 $135 $110 $224 $223 $205 $166
Landlord s Adjusted Net-Share Rent
Cash Rent Compared to LLD s Adjusted Net-Share Rent
Cash Rent Compared to LLD s Adjusted Net-Share Rent
Determining a Cash Rental Rate Cash rent market approach Net return to operator and land Landowner s adjusted net-share rent Percent of gross returns
Percent of Gross Returns Central High SPR Crop LLD's Adjusted Net-Share Rent Percent of Crop Returns Year Returns Net-Share Rent as % Crop Returns 30% 35% 40% 2007 $703 $271 38.6 $211 $246 $281 2008 $781 $288 36.9 $234 $273 $312 2009 $702 $207 29.5 $211 $246 $281 2010 $788 $280 35.5 $236 $276 $315 2011 $941 $343 36.4 $282 $329 $376 2012 $1,038 $371 35.7 $311 $363 $415 2013 $864 $279 32.3 $259 $302 $346 2014 $829 $264 31.8 $249 $290 $332 2015 $695 $204 29.3 $209 $243 $278 2016 $784 $254 32.4 $235 $274 $314 2007-2016 avg 2007-2016 high 2007-2016 low 2000-2006 avg 2000-2016 avg $813 $276 33.9 $244 $284 $325 $1,038 $371 38.6 $311 $363 $415 $695 $204 29.3 $209 $243 $278 $413 $147 35.6 $124 $145 $165 $648 $223 34.6 $194 $227 $259
Percent of Gross Returns
Summary Since 2012, operating in a lower return environment, more like pre 2007 times Rents that adjusted quickly to higher returns might not have adjusted as quickly to lower returns Rents that adjusted more moderately to higher returns probably need less adjustment downward
Summary continued.. Flexible cash rent leases (or crop share) are an alternative in times of uncertain revenues Even flexible cash rent leases need to be reviewed, is base to high or % of gross to high? If modest farm returns continue, will be continued pressure to lower the higher level cash rents
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