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Farmland opportunities are out there, adviser says

MIAMI — There are few or no bargains in U.S. farmland, but investors should look for land that is not being farmed up to its full potential, a prominent adviser said here last week as investors discussed farmland investment worldwide at the Agriculture Investment Summit of the Americas.

Perry Vieth
Perry Vieth, Ceres Partners
“The U.S. farmland market is mature, but undervalued where land isn’t being fully utilized because farmers are not using the latest practices or have not made improvements,” said Perry Vieth, president of Ceres Partners, a Granger, Ind., firm whose motto is “investing in America’s heartland.”

Vieth also noted that the value of the land depends on mineral rights. In Indiana, he said, buyers get the mineral rights, but in Pennsylvania, the price reflects the current interest in natural gas deposits in shale.

Jason Henderson, executive vice president of the Omaha branch of the Federal Reserve Bank of Kansas City, noted that farm land prices in the southern states have not risen as fast as they have in Nebraska, but added that mineral rights and water are important.

“There are three drilling rigs in western Nebraska,” Henderson noted. “When you buy land , you’re basically buying water. There’s strong demand for irrigated crop land in western Nebraska.”

Farmland is “very local,” Vieth said, noting that most of it is bought by neighboring farmers.

Gary Thien of Thien Farm Management, a Council Bluffs, Iowa, firm and a former president of the American Society of Farm Managers and Rural Appraisers, noted that when local farmers and investors compete for farmland at auctions, “the investor usually comes in second place.”

Discussing whether there is a bubble in farmland prices, David Oppedahl, the business economist at the Federal Reserve Bank of Chicago, said that it is hard to define a bubble but “you know it when it pops.”

Henderson said he believes there will be a correction, “but it won’t be an ’80s correction,” referring to the steep decline in farmland prices when export sales dropped. The biggest factors, Henderson said, will be whether interest rates rise and whether upward pressure on the value of the dollar pushes down commodity prices.

Shanda Warner, a partner in Chess Ag Full Harvest Partners LLC, a Dakota Dunes, S.D., and Clarksdale, Miss., firm that manages agricultural funds, said she believes farmland prices could “come off 10 to 15 percent.” Warner also said she is inclined to keep money in cash for the next few months.

Vieth said that if Congress eliminates, as expected, the direct payments that farmers get whether crop prices are high or low, that won’t affect farmland prices nearly as much as it would have when commodity prices were much lower.

Several panelists agreed that the crop insurance program is the most important farm program now. Warner acknowledged that Congress might eliminate parts of the farm program, but added “I pray the government to continues to look at the farm safety net.”

Several panelists said they anticipate specialty crops coming back in the Midwest.

David Oppedahl
David Oppedahl, Federal Reserve Bank of Chicago
“The local foods movement is very hot” in the Chicago area, Oppedahl said. “It’s a different style of agriculture but you can make a very good living on a smaller amount of land.”

The farm bill does not permit the planting of fruits and vegetables on land that gets program crop subsidies unless the farmer gives up the right to those subsidies, but Oppedahl said eliminating that restriction would also encourage the planting of more fruits and vegetables and bring more of those crops to the Midwest.

Farmland rents are in flux, the panelists said.

“Rents have lagged,” Vieth said. “It’s a function of what revenue the land will produce.”

Thien said rents are rising not because farm land managers negotiate higher rents but because farmers are competing for land and the more efficient farmers are willing to pay more.

Most land is rented on a cash basis, the panelists said, with a share of the crop second and a hybrid combination of rent and a crop share third. Oppedahl said he is seeing more interest in hybrid leases because high commodity prices have triggered the idea in landowners’ minds that farmers have gotten a good deal, but farmers also see the hybrid leases as a good idea because they do not have to pay so much in cash up front.

Vieth concluded that if investors are considering getting into farmland, he would encourage them to buy first in the United States and as their portfolios expand “branch out” internationally.