Cattle and crop producers are seeing record prices for their 2011 crops and animals and now agricultural landowners are starting to see more demand for their holdings.


Cattle and crop producers are seeing record prices for their 2011 crops and animals and now agricultural landowners are starting to see more demand for their holdings.
In the last year, prices for pasture and cropland have spiked to new five-year highs.
According to Farmers National Company, interest in agriculture land is coming from both producers, who are seeing record profits, and investors who are hoping to cash in on a profitable ag market.
"Farmland purchases have also become an attractive investment for non-operators in this environment," says Lee Vermeer, AFM, vice president of real estate operations at Farmers National Company. "It's definitely showing a more favorable return on investment than traditional investments like the stock market and CDs."
The Federal Reserve Bank of Kansas City reported earlier this month that prices for irrigated cropland jumped 14.8 percent and 12.9 percent on non-irrigated land during the fourth quarter of 2010 when compared to the same period in 2009.
The figures represent land holdings in seven states, including Kansas.
In a little over six months, high-quality farmland in Kansas grew in value by $500 per acre. A survey from the Farmers National Company shows an average per acre cost for purchased land at $3,000. In December, that number was up to $3,500.
Demand for pasture land has also spiked, likely due to a profitable cattle market. Cattle owners are buying land both in their own state and in neighboring states to help ensure pasture ground for the coming years.
Jerry Meng, vice president at Home State Bank & Trust in McPherson, said Central Kansas has followed regional trends with land prices that have jumped as much, if not more, than prices for land in the northeast part of the state.
The expanding price tags, Meng said, are the result of both heightened demand and increasing property values.
“Agricultural real estate is seen as a good investment,” Meng said. “People who have stood on the sidelines are beginning to invest in farm and pasture land.”
But despite renewed interest from outside investors, farm operators still account for nearly 85 percent of all land purchases.
Byron Enix, senior vice president for American AgCredit and manager of the Heartland Region, said producers have started seeing wider profit margins and are looking for safe and reliable places to invest their income.
The natural limited supply coupled with better potential profits has demand for land on the rise.
Enix said loan requests and approvals are both up for the Central Kansas and North Central Oklahoma areas.
William Crane, owner of Crane Auction in Gypsum, auctioned off 80 acres of grass in the northeast part of the county in December. The land, Crane said, brought a “good price for (both the) buyer and the seller.” The auction generated a good amount of interest from a number of parties.
The one market that is not following local trends is hunting and fishing land. Interest in those areas has declined in Kansas compared to national trends.
But rising land prices does pose a potential issue for some producers.
Meng said that higher land prices does impact some producers’ ability to secure financing for the purchase.
“When there are greater dollars loaned, there is a greater risk for both the producer and the bank or lenders,” Meng said.
Financial institutions have come under increased scrutiny from the government which means lenders must do a more thorough job underwriting loans.
Enix said discipline on the part of both the lender and the producer helps ensure loans remain viable and the agriculture industry doesn’t experience the bust that demolished the country’s housing market. AgCredit has a policy, Enix said, of not only examining the structure of the loan but also the structure of the applicants’ operation and business model. That means studying balance sheets and tax returns, not just collateral lists.
“When we lose our discipline, that’s when we see the negative,” Enix said. “We make a decision one loan at a time. We are always looking for long-viable operations. It’s not about the risk in the loan, it’s about the risk in the operation.”
Like all markets, the agricultural market will cycle and prices will likely not continue their climb but, Enix said, it is likely that the market could reset itself and retain current pricing levels. Outside influences, such as crop prices, interest rates and federal debt, could cause noticeable movement in the market.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned treasury debt-buying programs intended to stimulate the economy could create financial imbalances that could prove negative for agriculture.
“History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions,” Hoenig testified before the Senate Ag Committee. “Rising interest rates often coincide with falling farm revenues and higher capitalization rates, a depressing combination for farmland values.”