, December 07, 2015
NORMAL, Ill. — Farmland values reflect the productivity of the acres.
“The value of farmland is what it earns,” said Bruce Sherrick, director of TIAA CREF Center for Farmland Research at the University of Illinois.
The center tracks farmland values and helps to support institutions that are interested in farmland values, Sherrick explained during a presentation at the 2015 WILL Ag Farm Assets Conference, hosted by WILL Ag and sponsored by the Illinois Beef Association, the Illinois Corn Growers Association and the Illinois Pork Producers Association.
“We want to advance farmland markets through research and information,” Sherrick said. “We work to improve the accuracy and understanding of the asset class and provide unbiased research and tools for those involved in farmland investment.”
Farm assets are heavily concentrated in the farmland category.
“The sector is worth about $3 trillion and $2.5 trillion of that is in real estate,” Sherrick reported. “That’s an enormous concentration of 85-plus percent of the assets in one category.”
In addition, he said, the growth in asset values is quite large and the debt has not grown proportionally.
“The debt-to-equity and the debt-to-asset ratios are incredibly small with the sector in total having only 10.9 percent debt,” he reported. “The farm assets have grown at 5.4 percent and the real estate slightly higher than that.”
Top Returns
Research at the center has compared farmland to about 60 other asset classes in which people can invest.
“Farmland has dominated almost every other asset class we’ve identified,” Sherrick said.
“The story doesn’t change much in the 1991 to 2014 data,” he noted. “And for the last decade it is even more positive.”
Farmland has a positive correlation with the inflation rate, Sherrick said.
“Part of the answer to what farmland values will be in 2016 depends on what happens to inflation,” he added.
Data from 1970 to 2014, Sherrick said, shows farmland is much more stable rate of return than the production value or income suggests it should be.
“Farmland markets don’t move as quickly as the income underneath it does,” he said.
Big data has started to impact farmland values by delivering information that helps those involved in the industry to make management decisions.
“You can now get soils maps for free and weather information from lots of sources,” Sherrick said.
“On acrevalue.com you can look at the value of your farmland with information such as the crop data base, the soils and the weather for the last five years,” he said. “It is not necessarily the best estimate, but it is great technology for a base line.”
Changing technology, Sherrick said, will help farmers answer questions they haven’t thought about before or answer older questions better and this information can be obtained at a low cost.
“This is really cool technology where I can look from the sky and decide which field would be cheaper to rent based on agronomics and the distance to the rest of my locations,” he said.
A big data annual conference has been held at the U of I for several years.
“We have one of the seven largest computing facilities in the world and the conference is generated by the engineering and data science folks,” Sherrick explained. “This year half of the program was about agriculture.”
He said today’s farmland prices are much different than the situation in the 1980s.
“This is not the ’80s, because we now have crop insurance for corn, soybeans and wheat,” he noted. “And the debt ratios in the U.S. are very low.”
And the farm crisis during the decade ’80s, Sherrick said, was driven by farm interest rates.
“That didn’t affect the rest of the economy all that much,” he reported.
“Next year, I think there will be a 5 to 10 percent reduction in cash rents, which may translate to a 5 to 10 percent reduction in farmland values,” Sherrick said.
“On a long-term basis, farmland is a solid investment,” he said.