A few weeks ago, Mr. Lindstrom said similar land sold for nearly $11,000 an acre.
This is a common story across the farm belt. In Indiana, William C. Ade, who made a fortune in oil and gas exploration in Asia, said he stopped adding to his 1,000 acres when the price passed $5,000 an acre.
“Right now it’s at auction as high as $12,000 an acre,” he said of land to grow corn and soybeans in northwest Indiana. “A poor plot of land went for $8,000.”
Mr. Lindstrom, who is a financial adviser at UBS Wealth Management in Omaha, and Mr. Ade, a member of the investment club Tiger 21, are among investors who say they believe farmland could be headed for a serious drop in values, if not a full-on crash. Of course, many of them have been thinking that for years.
The traditional view of farmland, from the farmer to the agricultural economist to the investment adviser, is, as Mr. Ade put it, “an inflation-proof bond.” (“No one is going to steal it,” he said. “No one is going to default on it. If inflation goes up, it will still be there.”)
After the financial collapse of 2008, most forms of real estate were shunned. But not farmland. Prices shot up, driven by rising commodity prices from global demand, low interest rates in the United States and high auction prices begetting higher prices.
Now commodity prices have fallen. Corn has gone to about $4.60 a bushel this week from over $8 a bushel last year. Soybeans have fallen to about $12.60 a bushel from over $17. Yet the value of farmland for row crops has continued to rise.
“We’re kind of at an inflection point,” said Brent Gloy, a professor of agricultural economics at Purdue University. “We’ve had five years of spectacular profitability that was somewhat unanticipated. The U.S.D.A. was forecasting much lower than this, so it surprised people.”
Yet there are still reasons to think that there will be buyers for land who will hold on to it for decades to come. A report released by U.S. Trust highlighted the graying of America’s farmers and their need to sell or lease their land as they age.
“Can land go up and down?” asked John Taylor, national farm and ranch executive for U.S. Trust, which manages 900 farms for investors. “Sure. But I’ve never seen land go to zero. And with world demand, there is no vacancy factor on good U.S. farmland.”
All of this raises the issue of whether it is time to sell.
Brian C. Duke, vice president for Northern Trust, said that even with the run-up in prices for commodities, the annual return of farmland remains about 3 percent. Since 2000, the value of land in Illinois, for example, has increased 207 percent. For an investment comparison, The Dow Jones industrial average went up 42 percent in that period. Triple-digit appreciation has a way of luring new investors.
More experienced investors said that appreciation isn’t the goal: to realize it you have to sell the land. “The capital gain is nice, ” said Albert Kirchner, who is known as Bud and owned a manufacturing company. “We don’t look at the capital gain. We look at it from a productivity standpoint.”
Mr. Kirchner owns 6,000 acres of corn and soybean land in Illinois, an 8,000-acre cattle ranch in Montana and 1,200 acres of timberland in Florida. But his benchmark since he started investing in land after World War II has remained a 4 percent annual return.
At that number and using Agriculture Department estimates that the average farmland value in Illinois is $7,800, Mr. Kirchner’s land would be worth $46.8 million, with an annual return of $1,872,000.
Article source: http://www.nytimes.com/2013/08/17/your-money/despite-drop-in-commodity-prices-farmland-values-rise.html?partner=rss&emc=rss