Drought Seen Prompting Pause in U.S. Farmland Price Gains

Farming’s inherent risk, forgotten during years of booming incomes that pushed farmland values to records, may damp enthusiasm for investing even as government subsidies buoy U.S. cropland returns, analysts and farmers say.

The U.S. Department of Agriculture today probably will say that farmland values reached an all-time high this year as crop and livestock prices surged and export demand stayed near a record. Still, the drought gripping the U.S. Corn Belt may lower farmer appetite to buy up land and make some investors shy away from an investment that may be less attractive in the short term, said Brent Gloy, an agricultural economist at Purdue University in West Lafayette, Indiana.

“From an economics impact, one year shouldn’t have a big impact,” Gloy said in a telephone interview. “From a psychological impact, people won’t be as aggressive buying land in places that didn’t have a crop.”

Farm income will reach $91.7 billion this year, second only to last year, according to a USDA forecast made before the drought. Corn traded in Chicago surged 57 percent through yesterday since June 15, as the drought spread into the Midwest, while soybeans gained 23 percent. Cattle futures climbed 7.2 percent since mid-June. The USDA’s next estimate of farm profit for 2012 will be at the end of this month.

‘Macroeconomic Worries’

“Dramatic” gains in farmland prices in 2012 and “looming macroeconomic worries” will slow increases next year, Rabobank International said in a report last week. Values may may rise by 10 percent or less in the first half of next year, said Sterling Liddell, a vice president of Rabobank’s food and agribusiness research based in St. Louis. Gains in some ares exceeded 30 percent during the 12 months through June, according to the report.

In Illinois and Indiana, two of the hardest-hit drought states, farmland prices rose about 50 percent from 2006 to 2011, according to USDA data. Such gains may be difficult to sustain as farmers, seeing seared fields, decide to invest more conservatively, said David Carr, who grows corn and soybeans near Macon, Illinois.

Small farmers, many of whom rent their land, faced with a year of loss, may not be able to compete with larger growers and investors in bidding for attractive parcels, he said. Still, crop insurance, which in some cases will cover 85 percent of a farmer’s expected revenue this year, should keep many growers afloat, allowing sellers to argue that even in a drought, farmland is a stable investment, Carr said.

Prices, Yields

“Something like this, you would think it would slow prices down. But maybe it won’t,” he said. “Good commodity prices and yields have been driving farmland, and if we can get back to that, we should be OK.”

Pastureland used for cattle-ranching may fare worse than cropland because of the lack of insurance support, said Jim Farrell, president and chief executive officer of Farmers National Co., based in Omaha, Nebraska.

In parts of Texas and other areas where the dry conditions have persisted for more than a year, “the drought could have a weakening effect on some of those values,” Farrell, whose company manages more than 5,000 farms across the Midwest and Plains, said in an interview. Still, investors looking for longer-term investments may take advantage of any pause in price gains to snap up properties, he said.

“Some land, when you see it come up for sale, you may never see it again,” Farrell said. “It’s a different dynamic” from housing or other real-estate markets.

Interest rates that have made long-term investments in productive land attractive, along with high crop prices, will remain the key determinants of what farmland is worth, said Keith Collins, a former chief economist for the USDA.

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net

To contact the editor responsible for this story: Steve Geimann at sgeimann@bloomberg.net

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