North Dakota Land Values and Rents Outlook

Transcription

1 North Dakota Land Values and Rents Outlook BRYON J PARMAN DEPARTMENT OF AG. BUSINESS AND APPLIED ECONOMICS NDSU EXTENSION Presentation Outline Quick Farm Financial Situation and Outlook Farm Solvency and Debt Rents and Values Margins vs. Sales Prices Akerson Evaluation for ND Net Farm Income at its lowest level in Nearly 1 Years Difference between Net Cash Income and Net Farm Income Net Cash Income -Does not deduct depreciation -Does not treat family living as operating expenses -Treats CCC loans as sales -No Accrual oriented adjustment Net Farm Income calculated in traditional accrual accounting fashion

2 Farm Production Cost Index in 11 Dollars 1 Prices Paid by Farmers Prices Paid Index for 11 Dollars Year Which Periods Are Abnormal? Net Cash Farm Income in 11 Dollars Years Below Average 21 Years At or Above Average USDA Projected Net Farm Income to Millions F

3 From KC FED: Volume of Loans over $1 Million Nearly Doubles Debt to Asset Ratio at Market Value for North Dakota and Minnesota 6% % 4% % 3% 3% 2% % 1% 1% % % MN ND ND & MN Debt - Asset Ratio

4 Using Debt To EBITDA Ratio It may be too late by the time poor solvency ratios (D/A or D/E) are the predominant reason for credit denials The following charts use debt average EBITDA where earnings are averaged over a two year period. Debt EBITDA Ratio Credit Rating for Ag. Moody s Rating Investment Grade AAA. Highest Lowest Credit Risk AA.1 1. High - Grade A Upper Medium Grade Speculative Grade Baa Medium Grade Ba Speculative elements B Subject to high credit risk Ca Highly Speculative C > 8. or < Lowest Rating In default w/ low recovery prospects 7 6 Ca Caa Debt to EBITDA 12 1 C ND Debt To EBITDA by Net Farm Income Pct Ba Baa A AA AAA F Ca Caa Baa A AA AAA US Total MN ND % 6% 6 8% Top %

5 8 7 Ca ND Debt To EBITDA by Gross Revenue Class C MN Debt to EBITDA by Gross Revenue Class Caa Baa Ba B AAA AA A Ca Caa Baa Ba B AAA AA A 1,1 2, 21k k k 1m 1m 2m 2m+ 1,1 2, 21k k k 1m 1m 2m 2m+ Recap Net Farm Income Low Mostly on the crops side Solvency still strong using wealth metrics Debt Asset / Debt Equity ratios High debt relative to income Stress showing in extensions, renewals, and restructured loans Low interest rates have helped soften the blow, but they are increasing

6 Farm Income Margin Better at gauging stress/risk than Net Farm Incomes Margin = Net Farm Income Ratio Margin = The net farm income ratio measures the amount of net farm income generated per dollar of production in the farm sector. Alternatively, it shows the proportion of production remaining after accounting for expenses. A value of 1 would signify all production was realized as net income or equivalently, no expenses were incurred. Larger values signify increased sector efficiency in converting production to net farm income. Source: Farm Income Margin Net Farm Income vs. Farm Income Margin Example: Total costs are 9, and Revenues are 1,, NFI = 1k Margin = 1% (Costs could to increase 11%) Total costs are, and Revenues are, NFI = 1k Margin = % (Costs could increase 2%) North Dakota Revenue Margin 2 Year Moving Moving Average

7 Fundamental Interest is a Fundamental Component of Agricultural Land Valuation Returns Expected Returns Includes: Annual Expected Profits Reversion (Resale Value) Reversion Expectation Profit Financing Terms Financing/Lending Conditions (Interest Rates, Term, Required Initial Equity, and other Market Options) Applying Earnings Multiples to and Income in The 198 s Margin = Average Margin: % Average P/S: From Overvalued Low Margin High P/S 1.4 P/S Margin 1.6% 12 P/S Margin 23% Low Margin Low P/S From MV/Sales P/S = Price of land/sales of production High Margin High P/S 1.4 P/S Margin 27.% 7.2 P/S Margin 28% Undervalued High Margin Low P/S Profit Margin Land Price to Sales Ratio & Income Margin Land Price to Sales Ratio & Income Margin P/S Ratio Margin (%) Average P/S: 13 Average Margin: 22.8 P/S Ratio Margin (%) Average P/S: 13 Average Margin: 22.8 Year Year

8 Land Price to Sales Ratio & Income Margin Land Price to Sales Ratio & Income Margin P/S Ratio Margin (%) P/S Ratio Margin (%) Average P/S: 13 Average Margin: Average P/S: 13 Average Margin: Near Record Low margins (1%) with record high P/S (23-28) Year Year 3 3 Land Price to Sales Ratio & Income Margin P/S Ratio Margin (%) Long and Short Term Averages Average P/S : 13% Average Margin: : 23% 2 1 Average P/S: 13 Average Margin: 22.8 Average P/S 4 13: 18.9% Average Margin 4 13: 23.2% 1 Near Record Low margins (1%) with record high P/S (23-28) Year

9 Applying Earnings Multiples to Margin = Average Margin: % Average P/S: % From Overvalued Low Margin High P/S 24 P/S Margin 16% 12 P/S Margin 22% Low Margin Low P/S From 18-?? MV/Sales P/S = Price of land/sales of production 7-13 High Margin High P/S 19.9 P/S Margin 23%??? 12 P/S Margin 2% Undervalued High Margin Low P/S 3-6 Profit Margin Fundamental Interest is a Fundamental Component of Agricultural Land Valuation Reversion Expectation Profit Financing Terms ND Cash Rents ND Land Values

10 North Valley Example 3.8% Gain Int. Rate.7% 1 6.% x 8.4% =. Amortization 2+ 3.% x 2.% =.7 Holding Period 3 6.% x 1.% x.18 =.118 LTV 6% 4= r.7 Ye 2.% Rm.8423 E 3%.18 x.181 =.24 r.7 6=.263 P 1 Sn Cap Rate 2.63% Ro 2.63% Net Income (Rent Ta $ 8. Net Income $8. Projected Cap Gain.38 Inflation Rate.2 Value $/Acre $3,44 North Valley Example No Capital Gain Int. Rate.7% 1 6.% x 8.4% =. Amortization 2+ 3.% x 2.% =.7 Holding Period 3 6.% x 1.% x.18 =.118 LTV 6% 4= r.7 Ye 2.% Rm.8423 E 3%.2 x.181 =.112 r.7 6=.396 P 1 Sn Cap Rate 3.96% Ro 3.96% Net Income (Rent Ta $ 8. Net Income $8. Projected Cap Gain Inflation Rate.2 Value $/Acre $2,21 As Interest Rates Rise? Int. Rate.7% 1 6.% x 8.4% =. Amortization 2+ 3.% x.% =.193 Holding Period 3 6.% x 1.% x.18 =.118 LTV 6% 4= r.63 Ye.% Rm.8423 E 3%.2 x.181 =.22 r.63 6=.378 P 1 Sn Cap Rate 3.78% Ro 3.78% Net Income (Rent Ta $ 8. Net Income $8. Projected Cap Gain.4 Inflation Rate.2 Value $/Acre $2,11 And Since Interest Rates Rise, Profits Low, Capital Gains Fall to Inflationary Levels Int. Rate.7% 1 6.% x 8.4% =. Amortization 2+ 3.% x.% =.193 Holding Period 3 6.% x 1.% x.18 =.118 LTV 6% 4= r.63 Ye.% Rm.8423 E 3% x.181 =.182 r.63 6=.448 P 1 Sn Cap Rate 4.48% Ro 4.48% Net Income (Rent Ta $ 8. Net Income $8. Projected Cap Gain.2 Inflation Rate.2 Value $/Acre $1,78

11 Worst Case Scenario (Deducting Property Taxes) Int. Rate 6.% 1 6.%x 9.8% =.9 Amortization 2+ 3.%x.% =.193 Holding Period 3 6.%x 1.%x.16742=.19 LTV 6% 4= r.674 Ye.% Rm.9764 E 3% x =.167 r.674 6=.6 P 1 Sn Cap Rate.6% Ro.6% Net Income (Rent Tax) $ 6. Net Income $6. Projected Cap Gain.2 Inflation Rate.2 Value $/Acre $1,18 With Rents at % of the Yield Expectation Int. Rate 6.% 1 6.%x 9.8% =.9 Amortization 2+ 3.%x.% =.193 Holding Period 3 6.%x 1.%x =.19 LTV 6% 4= r.674 Ye.% Rm.9764 E 3% x =.167 r.674 6=.6 P 1 Sn Cap Rate.6% Ro.6% Net Income (Rent Tax) $14 Net Income $14. Projected Cap Gain.2 Inflation Rate.2 Value $/Acre $2,86 A lower volume of farmland sales has competing implications. - Significantly lower sales volumes indicate buyers are not willing to pay what current owners expect to receive. - Lower sales volumes may help prop up values as fair market assessments are at lest partially anchored in historical observation. Conclusions and Comments Farm financial situation becoming more worrisome for crop farmers especially for high cost / highly leveraged individuals Net incomes continue to remain low Interest rates expected to increase Stable land values and relatively strong solvency ratios have helped support low incomes Land market has weakened but have mostly held their value since the peak in 14 High land prices have allowed individuals with equity to restructure debt and avoid delinquency Forced sales and higher interest rates will put downward pressure on land prices Higher rates means higher interest payments & better outside options for investors Falling land prices will likely put more producers in jeopardy Adjustments may be short lived but large

12 Thank You Bryon J. Parman, Ph.D Agricultural Financial Specialist North Dakota State University Extension