The Farmland Market: Buy, Sell, Hold Average Value Per Acre of Iowa Farmland Source: Iowa Agriculture Experiment Station The Market Two Iowa Sales Sioux County Parcel 1 80 acres, 70+ GSR - $3,260 Parcel 2 80 acres, 70+ GSR - $13,950 Chicago Fed Survey October Indiana 11% Illinois 8% Michigan 10% Estimates of average dollar value per acres as Nov. 1,, by Iowa crop reporting districts. First line: high, medium, and low grade farmland values. Second line: district average. Third line: average percentage change since Nov. 1, 2009. The Market Iowa Realtors Survey November, State average 16% increase 11 North Central Counties 20% increase Indiana 270% increase since 1985 5.4% per year e ($'s) Price per Acre Price per Acre for Average Quality Indiana Farmland, 1975-5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 1
Land Value per Bushel of Long-Term Corn Yield $ per bushe el 35.00 30.00 25.00 20.0000 15.00 10.00 5.00 0.00 1970 1975 1980 1985 1990 1995 2000 2005 2015 Year Top Average Poor Land Demand and Supply Supply Issues Market offerings Normal turnover 3-5% per year Current turnover 1.5% per year Dominance of gift/bequest transfers Rental opportunities/returns for recipients Return potential for proceeds Department of Agricultural Economics Purdue University Value/Cash Rent Multiple Average Indiana Land, 1975 Value/Rent Multiple 32 Current = 27.4 27 22 Mean = 18.0 17 12 7 1975 1979 1983 1987 1991 1995 1999 2003 2007 Year Land Demand and Supply Supply Issues Competitive returns and portfolio motivations of owners/investors Forced sales/liquidators Tax considerations future expected increased capital gains tax rates increase supply today Farmland Total Return Land Demand and Supply Return Percent 70% 60% 50% 40% 30% 20% 10% 0% Demand Issues Development/non ag production potential Competitive returns and portfolio motivations of owners/investors Inflation hedge potential of real assets -10% 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-20% -30% Year Rent/Value Change in Value Total Department of Agricultural Economics Purdue University 2011 2
Land Demand and Supply Demand Issues Tax considerations lower capital gains tax increase demand Expected incomes prices, costs, productivity Expected interest/discount rates Expected growth in income Income/Earnings Cash rents Residual Returns to Land Valuation Fundamentals Fundamental drivers Incomes/earnings The discount rate The growth rate for income/earnings The residual/terminal value Required Additional Acres for China and Ethanol Acres Million A 20 15 10 5 Bean Acres to China Corn Acres to Ethanol (DDG Adjusted) 0 2000 01 02 03 04 05 06 07 08 09 U.S. Harvest Year The Capitalization Concept World Grain Production and Use, 2000-20112011 2,300 (for an infinite life asset) 2,200 Production Value = income or earnings discount rate growth rate Million Metric Tons 2,100 2,000 1,900 Use 1,800 2011 3
Per Acre Cropland Cash Rent, January 1 The Discount $ per acre 200 180 160 140 120 100 80 60 40 3.7% 1.4% 2.9% 4.4% 0.0% $180 $169 $141 $101 $94 2006 2007 2008 2009 Pure time preference for money 2-4% Inflation premium Results in the riskless rate Proxy is U.S. treasury interest rates Risk premium 20 0 IL IN IA MO OH State Source: NASS, USDA Indiana Cash Rent Per Bu. Corn $/Bu. 1.15 1.05 0.95 08 0.85 0.75 0.65 0.55 1970 1980 1990 2000 2020 Year Department of Agricultural Economics Purdue University Top Average Poor te (%) Interest Rat Interest on 10-Year Treasury Bonds, 1970-18 16 14 12 10 8 6 4 2 0 1970 01 1971 03 1972 05 1973 07 1974 09 1975 11 1977 01 1978 03 1979 05 1980 07 1981 09 1982 11 1984 01 1985 03 1986 05 1987 07 1988 09 1989 11 1991 01 1992 03 1993 05 1994 07 1995 09 1996 11 1998 01 1999 03 2000 05 2001 07 2002 09 2003 11 2005 01 2006 03 2007 05 2008 07 2009 09 Residual Returns to Land Indiana (high quality) 1975-1990 -- $111/acre 1991-2000 -- $123/acre 2001- -- $188/acre 2007- -- $310/acre Average on 10-Year U.S. Treasury Bonds, 1970-2009 a Average Period Interest (%) 1970 to 1979 7.5 1980 to 1989 10.6 1990 to 1999 6.7 2000 to 2009 4.5 Entire period 1970 to 2009 7.3 a Calculated as the average of the annual average rate on 10-Year Constant Maturity U.S. Treasury Bond, reported by the Board of Governors of the U.S. Federal Reserve System. 2011 4
Risk Premium Capitalization s 1990 s Low for cash rents a real bond 1-2% Higher for farm operators 2-4% Risk Free s 6 Risk Premium 2 3 Growth Capitalization 0 8 3 5 0 9 3 6 The Growth Capitalization s 2000 s Cash rents 3% Residual returns 2-3% Risk Free s Risk Premium Growth Capitalization 4 2 3 0 6 3 3 0 7 3 4 Capitalization s 1970-1980 s 1980 s Sensitivity Risk Free s Risk Premium Growth Capitalization Income Price Cost Productivity 8 2 3 0 10 3 7 0 11 3 8 Value Capitalization Interest Risk Growth 2011 5
Scenario Analysis Value of $1,000 Investment in 1990: (pre-tax) Time Period 75-90 91-00 00-10 07-10 Residual Returns $111 $123 $188 $310 $280 Capitalization (%) 3 $3,667 $4,100 $6,267 $10,333 $9,333 4 $2,750 $3,075 $4,700 $7,750 $7,000 5 $2,200 $2,460 $3,760 $6,200 $5,600 6 $1,850 $2,050 $3,133 $5,167 $4,667 Last Year of Period $1,589 $2,715 $5,310 $5,310 $5,310 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 S&P 500 Farm Land 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 What If? Value Income Implied Cap $5,310 $280 5.27% Decline in come by 10% to $252 Value = $4,781 (-$528) Increase in cap rate by 1% Value = $465 (-$844) Both Value = $4,019 (-$1291) Risk and Return Average annual returns 1960-88 Investment Total From Income From Capital Gains ----------------- (Percent) ----------------- Farm: Farmland 10.6 5.4 5.2 Typical farm 10.7 8.2 2.5 Nonfarm: Stocks 10.4 3.9 6.5 Mutual funds 10.5 -- -- Gov t bonds 6.1 7.3-1.2 Municipal bonds 5.4 6.2-0.8 Corporate bonds 6.6 8.2-1.6 Treasury bills 6.5 6.5 -- Commercial paper 7.1 7.1 -- Certificate of deposit 6.8 6.8 -- Average Annual Returns, 1997 - Land As a Portfolio Asset l Percent) Return (Annual 12% 10% 8% 6% 4% 2% 11% IL Farmland 8% 7% LT Govt Bonds LT Corp Bonds 3% T-Bills 11% Small Co Stocks 7% Large Co. Stocks 0% 0% 5% 10% 15% 20% 25% 30% Risk (Standard Deviation) 2011 6
Risk and Return Closing Thoughts Ag is a good to place to be NOW Recession Resilient Strong Earnings Future Real Assets/Good Inflation Mitigation Strategy BUT the risk has increased Margin risk Interest rate risk Don t ignore the weather Strategic risk Correlation and Beta (1992-2008) 2008) Farmland Correlations S&P 500 -.153 Ag Products -.218 CRB Index (.087) Fertilizer and Ag chain -.318 Packaged Foods & Meats -.135 Closing Thoughts Earnings Pressures will Increase Rebuilding of Supply Stocks Cost Increases Current Margins are not Sustainable Capital Costs will Rise And Safety is Relative Economic turbulence Correlation and Beta (1992-2008) 2008) Beta s Farmland.098 Packaged Foods & Meats -.585 Fertilizer & Ag Chem -.909 Ag Products.744 CRB Index -.151 So What Should You Do? Don t Drink the Kool-Aid 9 billion people by 2050 They need money A lot can happen in 40 years A lot can happen in 40 years Managing/Assessing the Risk is the Key The differentiator between Success and Survival Uncertainty Provides Opportunity Assess According to the Criteria Be more Selective/Discriminating 2011 7
So What Should You Do? Manage operating/financial Risk in your current business so you can capture new ventures Increase your hurdle rate for new ventures risk is higher, you need a higher return Lock in interest rates and deleverage maybe it s time to take some money off the table Thanks!! 2011 8