Land Values/Trends. Purpose of land talks. Factors impacting agricultural land values. Factors/issues impacting land values

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Land Values/Trends

and Buying Land

www.agmanager.info

Kevin C. Dhuyvetter

785.532‐3527 ‐‐ kcd@ksu.edu

Department Agricultural Economics

Kansas State University

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Purpose of land talks

• Develop an understanding of the underlying economic

principles and management aspects of land ownership

and leasing

• Trying to reduce decisions to numbers

• Two decision tools:

– KSU‐Landbuy.xls

– KSU‐Lease.xls

Related papers are found at

www.agmanager.info

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Factors/issues impacting land values

• Farm profitability

• Farm size

• Government programs

• Input costs (e.g., fuel and fertilizer)

• Interest rates

• Outside investors (i.e., stock market money)

• Recreation uses (e.g., hunting)

• Ethanol and bio‐diesel / global demand for grain

• Section 1031 tax exchanges

• Technology (e.g., no‐till, precision ag, bio‐tech, DNA)

• Urban sprawl

• Weather (i.e., drought, flood)

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Factors impacting agricultural land values…

• Ag factors

– Ag portion of land value has been diminishing (long term)

– Reduced ability to cash flow traditional land loans with value of

agricultural production

• Non‐ag factors

– Urbanization, recreational use of land, etc. ‐‐ more related to the

condition of overall economy

• While agricultural land may continue to be a good

investment, producers need to decide if they want to tie

up equity in land versus other assets

• Increasingly difficult to analyze/evaluate land

purchases/prices

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Land is Unique

• Most fixed of farming assets

– Residual claimant

– Capitalizes government subsidies

• Often is taxed

– Favorably or unfavorably

• Has non‐ag benefits that may be pecuniary

• Has non‐pecuniary benefits

• A long term investment involving long term

expectations – history is a guide

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Historical land values and growth

7 Allen Anderson Atchison Bourbon Brown Chautauqua Cherokee Coffey Cowley Crawford Doniphan Douglas Elk Franklin Greenwood Jackson Jefferson Johnson Labette Leavenworth Linn Lyo n Miami Montgomery Nemaha Neosho Osage Pottawatomie Shawnee Cheyenne Decatur Ellis Gove Graham Logan Ness Norton Phillips Rawlins Rooks Rush Sheridan Sherman Thomas Trego Wallace Barber Harper Harvey Kingman Mcpherson Pratt Reno Rice Sedgwick Stafford Sumner Barton Wabaunsee Morris Clay Cloud Dickinson Ellsworth Geary Jewell Lincoln Marion Marshall Mitchell Osborne Ottawa Republic Riley Russell Saline Smith Washington Clark Comanche Edwards Finney Ford Grant Gray Greeley Hamilton Haskell Hodgeman Kearny Kiowa Lane Meade Morton Pawnee Scott Seward Stanton Stevens Wichita Wilson Woodson Wyandotte Chase Butler Atchison: 2007 land value = $1366 Corn/soybeans Cheyenne: 2007 land value = $616 Wheat/fallow -- Cow/calf Sumner 2007 land value = $938 Wheat 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 250 500 750 1,000 1,250 1,500 $/acre Cheyenne Sumner Atchison

Land value, selected Kansas counties, 1880-2010

Ag Census, land and buildings

CN AT

SU

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9 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 $/acre Kansas Oklahoma Missouri Nebraska

Average farm real estate value, 1880-2010

Ag Census, land and buildings

NE MO KS OK 10 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 300 600 900 1,200 1,500

land value ($/acre)

-20% -10% 0% 10% 20% 30%

annual growth rate (%)

land value growth rate

KS land value (incl. bldgs); 1880-2010

average annual growth = 3.95%

11 1879 starting land value for Kansas was $10.30

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 0 300 600 900 1,200 1,500

-20% -10% 0% 10% 20% 30%

land value growth rate geometric growth

KS land value (incl. bldgs); 1880-2010

average growth = 3.95%; geometric growth = 3.73%

geometric growth

Crop Land Average Value per Acre

January 1, 2011

Change from 2010 National average = +9.4% KS = +13.0%; NE = +17.9% OK = +2.6%; MO = +5.9% * Corresponding changes in pasture land values were US=+1.9%; KS=+2.5%; NE=+9.5%; OK=+2.0%; and MO=+2.4%. Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU)

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National average = +5.7%

Crop Land Average Annual Growth Rate

Jan 1, 2006 to Jan 1, 2011, percent (geo mean)

Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU) 13 National average = +8.8%

Crop Land Average Annual Growth Rate

Jan 1, 2001 to Jan 1, 2006, percent (geo mean)

Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU)

Pasture Land Average Value per Acre

January 1, 2011

Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU) Change from 2010 National average = +1.9% KS = +2.5%; NE = +9.5% OK = +2.0%; MO = +2.4% * Corresponding changes in crop land values were US= +9.4%; KS=+13.0%; NE=+17.9%; OK=+2.6%; and MO=+5.9%. National average = +2.8%

Pasture Land Average Value Annual Growth Rate

Jan 1, 2006 to Jan 1, 2011, percent (geo mean)

Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU)

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National average = +11.5%

Pasture Land Average Value Annual Growth Rate

Jan 1, 2001 to Jan 1, 2006, percent (geo mean)

Source: USDA NASS Land Values 2011 Summary and Dhuyvetter (KSU) 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 $/ ac re Kansas Non‐irrigated Crop Land NW NC Avg Source: Kansas Agricultural Statistics and K‐State 18 MF‐1100

Crop land values at regional level as reported by KAS

(2011 values estimated by K-State)

100 200 300 400 500 600 700 800 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 $/ acr e Kansas Pasture Land NW NC Avg Source: Kansas Agricultural Statistics and K‐State 19

Pasture land values at regional level as reported by KAS

(2011 values estimated by K-State)

MF‐1100 ‐2 0 2 4 6 8 10 12 14 16 18 20 22 24 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Pe rc e n t Kansas Non‐Irrigated Crop Value ‐‐ Year‐to‐Year Change KAS (avg=4.81%) KC Fed (avg=6.65%) Source: Kansas Agricultural Statistics, Kansas City Federal Reserve, and K‐State 20

Percent change in crop land values from two sources*

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‐2 0 2 4 6 8 10 12 14 16 18 20 22 24 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Pe rc e n t Kansas Pasture Land Value ‐‐ Year‐to‐Year Change KAS (avg=5.54%) KC Fed (avg=6.81%) Source: Kansas Agricultural Statistics, Kansas City Federal Reserve, and K‐State 21

Percent change in pasture land values from two sources*

Kansas City-Tenth Federal Reserve District includes CO, KS, NE, OK, WY, 1/2 of NM and 1/3 of MO

200 400 600 800 1,000 1,200 1,400 1,600 1,800 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 $/ ac re Non‐irrigated Crop Land NW/NC Kansas KAS NW/NC Avg 2010 Equal 1992 Equal Source: Kansas Agricultural Statistics, Kansas City Federal Reserve, and K‐State 22

KAS values versus imputed values from KC Fed % changes…

100 200 300 400 500 600 700 800 900 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 $/ ac re Pasture Land NW/NC Kansas KAS NW/NC Avg 2010 Equal 1992 Equal Source: Kansas Agricultural Statistics, Kansas City Federal Reserve, and K‐State 23

KAS values versus imputed values from KC Fed % changes…

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Land growth rates vs. inflation

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25 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 300 600 900 1,200 1,500

0 20 40 60 80 100 inflation index (2010=100) land value inflation index

KS land value and inflation index (correlation = 0.96)

avg 1880-2010 growth: land = 4.0%; infl = 2.3%; real land = 1.7% avg 1951-2010 growth: land = 5.1%; infl = 3.4%; real land = 1.7%

26 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 500 1,000 1,500 2,000 2,500

0 20 40 60 80 100 inflation index (2010=100) land value inflation index

AL land value and inflation index (correlation = 0.98)

avg 1880-2010 growth: land = 5.1%; infl = 2.3%; real land = 2.8% avg 1951-2010 growth: land = 6.5%; infl = 3.4%; real land = 3.0%

27 1960 1968 1976 1984 1992 2000 2008 0 200 400 600 800 1,000 1,200 1,400

non-irr value ($/acre)

0 120 240 360 480 600 720 840

pasture value ($/acre)

Non-Irr land value Non-Irr growth = 4.61% Pasture land value Pasture growth = 5.16%

Kansas land values by class, 1960-2010

Inflation = 3.59% 28 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 $/acre Actual Growth = 3.0% Growth = 5.0%

Kansas land values & projections, 1971-2021

projections start with 2011

value

3% 5%

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Returns to land

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Returns to land

• Capital gains (growth)

• Cash returns (rent)

• The two returns to land are similar to other

investments such as the stock market (capital

gains and dividends)

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Rent

• KFMA farms with > 100 crop acres

(2008‐2010 avg)

– 88% of KFMA farms use rented crop land

(range across six regions, 81%‐93%)

– 61% of crop acres farmed by KFMA members are

rented (range across six regions, 52%‐71%)

• For owner‐operators rent is the “profit” assigned

to land after all other opportunity costs are

considered

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 rent ($/acre) -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

KSU suggested growth = 2.64%

KS non-irrigated crop land rent; 1967-2011

1967-2011: avg growth = 3.00%; geo growth = 2.81% 1992-2011: avg growth = 1.58%; geo growth = 1.71%

rent $

growth rate geo growth

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Kansas Nonirrigated Cash Rents, 2011*

* Cash rent values as reported by USDA NASS and Kansas Agricultural Statistics (KAS). KAS did not report values for BR, DP, GT, KE, RA, TH and WY counties – values for these counties were filled in with multi‐county averages.

State average = $44.00 compared to $43.50 in 2010 (+1.1%)

Non‐irrigated Cash Rent – 2011 change from 2010, $/ac

Of 95 counties with data in both 2010 and 2011, 35 (36.8%) decreased, 54 (56.8%) increased, and 6 did not change.

Average change = $0.43 (ranged from ‐$5.50 to +$7.00)

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 $2 $4 $6 $8 $10 $12 $14 $16 $18 rent ($/acre) -12% -6% 0% 6% 12% 18% 24% 30% 36%

KSU suggested growth = 2.57%

KS pasture land land rent; 1967-2011

1967-2011: avg growth = 2.86%; geo growth = 2.63% 1992-2011: avg growth = 1.70%; geo growth = 1.53%

rent $ growth rate geo growth 35 If grain demand continues, expectation for growth might need to be raised * Cash rent values as reported by USDA NASS and Kansas Agricultural Statistics (KAS).

Kansas Pasture Cash Rents, 2011*

KAS did not report values for ED, GT, HS, KW, LV, ST, SV and WY counties – values for these counties were filled in with multi‐county averages.

State average = $16.00 compared to $15.50 in 2010 (+2.4%)

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Pasture Cash Rent – 2011 change from 2010, $/ac

Of 95 counties with data in both 2010 and 2011, 27 (28.4%) decreased, 51 (53.7%) increased, and 17 did not change.

Average change = $0.59 (ranged from ‐$4.00 to +$7.00)

1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 0 200 400 600 800 1,000 1,200 1,400

0 8 16 24 32 40 48

cash rent ($/acre)

Land value Cash rent

Kansas (Jan 1) non-irr land value & cash rent, 1967-2011

Correlation = 94% rent value 38 39

Capitalization Formula



A nnual land income

Capitalization rate

V alue

 



Annual land income

V alue

Cap rate rtv

1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 0 200 400 600 800 1,000 1,200 1,400

3 4 5 6 7 8 rent-to-value (%) Land value rent-to-value

Kansas (Jan 1) non-irr land value & rent-to-val, 1967-2011

Correlation = -92%

rent-to-value

value

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1976 1980 1984 1988 1992 1996 2000 2004 2008 1 2 3 4 5 6 7 8 9 10 11 percent Non-irr = 5.46% Irr = 7.07% Pasture = 3.37%

Rent-to-value (Jan 1) percent, Kansas, 1976-2011

non-irr irr pasture 41

Rent‐to‐value varies by land type…

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Why are Rents Lower on Pasture

than on Farmland?

• People just love cows and pasture

• Security more important in cattle production

• Imperfect markets/sticky prices

– share rents would adjust to technology faster

– share rents would keep cash rents in line

– little share renting in pasture

– landlord management small (tenant power)

• Less desirable pastures are rented

– size, shape, location, grass quality, water, fences

• Non‐ag influence

(greater on pasture than crop)

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Land as an Investment

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Buying and owning land – ideas

• Total return = rent + capital gain

• Land doesn’t cash flow when purchased

– i.e, rents don’t cover a 100% loan

• Cash flow is not the same as profitability

• Rents grow, loan payments don’t

– land eventually cash flows

• Income tax and capital gains tax rates matter

• Long‐term investment means time value of money

matters

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Buying Land – How much can I afford?

• Valuing the capital gains portion

– Pick a “selling point,” say 30 years from now

– What will the land be worth then?

• Assume some annual capital gain % ‐‐ ag and non‐ag

– What is left after “sell” & pay cap gains tax?

– What is that amount worth today?

• Valuing the rent portion

– What is cash rent today, ag and non‐ag?

– How will rents evolve (grow) over time?

– What is the future stream of rents worth today?

• Maximum bid = today’s value of the capital gain +

today’s value of the rent stream

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Non‐ag Considerations

• There could be a non‐ag rent:

– e.g., leasing your land to hunters

• There could be a non‐ag land value growth:

– e.g., expectations of future development

• KSU‐Landbuy.xls allows for both

• But first some historical information

1951 1958 1965 1972 1979 1986 1993 2000 2007 -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% percent

39-state average total returns, by year, 1951-2010

47 High farming profit in 2008 didn’t make it to rents or end‐of‐year land values 1951 1958 1965 1972 1979 1986 1993 2000 2007 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% percent

39-state average rent-to-value ratios, by year, 1951-2011

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UT NM TX PA AZ OK MI OH CA NV NY LA KS SC IL WV NC FL VA IA OR IN WA CO WI AR KY NE MT ID TN MN AL MO SD ND MS GA WY 0.0% 1.5% 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% 13.5% 15.0% percent

Returns to non-irrigated cropland by state 1951-2010

avg: non-ag growth= 1.7%; ag growth= 4.3%; rent= 5.1%; total= 11.2%

land = 11.2% stock = 11.8% (8.5% gain, 3.3% div)

non-ag growth ag growth after-prop-tax rent 49 39 states ranked by total returns to land 50

Land returns vs. farm returns

• Kansas Farm Management Associations

– 2,000+ farms per year 1973 – 1999

• Less farms if require multi‐year presence

– Calculated an after‐tax ROE (ATROE)

– Converted ATROE to pre‐tax according to:

PTROE = ATROE/(1 – 0.35)

• Kansas farm returns are compared to Kansas land

returns and to the S&P

Sidebar 51

1973‐1999 annual returns

• S&P fund

15.2% avg and 16.7% std

• Land portfolio

10.1% avg and 10.7% std

• Portfolio of average farms (138 farms)

8.3% avg and 10.5% std

• Portfolio of “top‐third” farms (46 farms)

13.9% avg and 14.8% std

• Portfolios of farms, or land, or stock have lower risk

than individual farms, parcels, or stocks

Sidebar 52

Analyzing a Land Purchase

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Land purchases often made with gut‐feel

• Often get caught up in:

– the emotion of bidding

– local or national price bubbles

– the fallacy of “comp” sales

– over (or under) valuing certain attributes (e.g., distance)

– “tired of missing opportunities of the past”

– “tired of looking – must buy something now”

• Consistent procedures can help

– every potential purchase viewed as an investment with an expected

cash and growth return

– unemotionally separates good from bad buys

• We routinely observe individual sales ranging from 75% to

175% of “market,” especially today

– Were such purchases actually rational economically?

– What the heck IS the market?

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KSU‐Landbuy.xls spreadsheet for land investment decisions

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Blue values

are user inputs – all other values are calculated

_{For more information and decision}

tools related to farm management, marketing, and risk management go to www.AgManager.info