2013 Fresno Agricultural Valuation Symposium: Bubble or Just the - - PowerPoint PPT Presentation

2013 Fresno Agricultural Valuation Symposium: Bubble or Just the Beginning?

Wednesday, January 23, 2013 The Economics of Farm Real Estate Value: A New Reality?

• Dr. Mechel S. Paggi

Director, Center for Agricultural Business

Are Higher Land Values A Bubble?

— Why are We Having this Discussion — Fundamentals in Determining Agricultural Land

Values

— What Does the Future Look Like For Market

Fundamentals

— What Does it Imply for Land Values

Why are We Having this Discussion ?

US Farm Real Estate Values Have Been Steadily Increasing

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 500 1000 1500 2000 2500 Do llars p er acre

Change 1970-1980 current $ ... +276% inflation adj. ... 77% Change 1980-1990 current $ ...... -7% inflation adj. ... -42% Change 1990-2000 current $..... +60% inflation adj. ... 21% Change 2000-2010 current $ ... +102% inflation adj...+ 59%

Farm Real Estate (current dollars) Farm Real Estate (inflation adjusted*)

*Inflation adjustor: price index for Gross Domestic product (2005=100); source: Dept. of Commerce, BEA

Even When Adjusted For Inflation

With A Diverse Regional Profile

IL 181% IN 154% OH 90% PA 69% NY 97% NC 46% ND 200% SD 271% MN 183% MI 86% WI 112% WV 82% VA 84% SC 58% GA 71% FL 54% AL 44% MS 88% KY 73% TN 51% MO 126% IA 258% NE 273% KS 158% MT 70% WY 41% CO 45% NM 27% TX 94% OK 116% AR 101% LA 78% UT

• 7

AZ 52% CA 71% NV OR 52% WA 54% ID 60% MD 80% VT NH ME MA RI DE 123% NJ 37% CT

less than 60% 60% to 120% 120% to 180% Over 180%

U.S. average increase 2002 to 2012 = 123%

Change from 2002-2012

California Cash Rent

Reflects Land Value Pattern

Fundamentals in Determining Agricultural Land Values Is this Trend Sustainable?

Farm Income & Interest Rates Basis

— Fundamental Economic Measure: Price-to-Value

Capitalized Value = Cash Rent / discount factor

(measure of cash flow) (appropriate interest rate)

Price-to-Value = Land Value / Capitalized Value

When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

California By The Numbers

USDA,NASS, 9.14.12

Irrigated Cropland - 2012

• Avg. Cash Rent: $350

Discount Rate: 3.2%*

• Avg. Capitalized Value: $350/3.2% = $10,937
• Avg. Value Reported = $12,000

Price-to-Value Ratio: $12/$11 = 1.09

When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

California Example

* 10 Year Treasury Note

Irrigated Cropland - 2012 Cash Rent: $300** Discount Rate: 3.2%*

• Avg. Capitalized Value: $300/3.2% = $9,375

Value Reported (Exchange Contractors) = $9,000** Price-to-Value Ratio: .96 When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

Fresno County Example

* 10 Year Treasury Note; ** High End 2012 Trends in Agricultural Land & Lease Values

Tree Fruit - 2012

• Avg. Cash Rent: $400

Discount Rate: 3.2%*

• Avg. Capitalized Value: $400/3.2% = $12,500
• Avg. Value Reported = $9,000 - $14,000

Price-to-Value Ratio: 0.72 - 1.12

When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

Fresno County Example

* 10 Year Treasury Note

Almonds - 2012

• Avg. Net Return Above Total Costs: $480*

Discount Rate: 3.2%**

• Avg. Capitalized Value: $480/3.2% = $15,000
• Avg. Value Reported = $12,000 - $18,000

Price-to-Value Ratio: 0.84 - 1.16

When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

Fresno County Example

Based on $1.99 per pound & 2200 lb/ac TC = $3,897 ** 10 Year Treasury Note

Interest Rate Influence

Irrigated Cropland - 2012

• Avg. Cash Rent: $350

Discount Rate: 5.0%*

• Avg. Capitalized Value: $350/5.0% = $7,000
• Avg. Value Reported = $12,000

Price-to-Value Ratio: $12/$7 = 1.71

When Price-t0-Value Ratio > 1.0 Value is not Supported by Farming Income Stream

California Example

* 10 Year Treasury Note

Path of Development Effect Additional Consideration

What Does the Future Look Like For Market Fundamentals?

We did not Go Off the Cliff But Where are we Going?

Overall Future Looks Encouraging For Agriculture

FAPRI Baseline 2012 Farm Income

Interest Rates (Discount Rate)

FAPRI Baseline 2012

Interest Rates (Discount Rate)

1 2 3 4 5 6 7 8 9 Percent

10-year Treasuries

Federal Funds Rate

90 91 92 93 94 95 96 97 98 99 00 01 02 04 03 05 06 07 09 08 12 10 11 13 14

Interest Rates (Discount Rate)

Central Valley Commodity Prices

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

75 100 125 150 175 200 225

Prices received index (1990-92=100)

All crops Fruit & Nuts Commercial vegetables Alfalfa

Change 2007 to 2012 All crops ........................ +63% Fruit & Nuts ................... +10% Commercial Vegetables .. +9% Potatoes & dry beans ..... +34% Cotton ............................ +60% Feed & Oilseeds .............. +88% Alfalfa hay …………………… +55% Livestock and dairy ......... +19%

Specialty Crop Price Index

Summary

Future of Land Values

— Different Situation from 1980’s or housing bubble — Purchases from strong financial positions, not debt on

top of debt; significant equity (cash and collateral)

— Income producing asset with fixed supply; no risk of

• ver-building/over development like housing and

commercial real estate

Summary

Future of Land Values

— Commodity Prices (Long Run Food Demand) — Interest Rates (Need to Stimulate Economy) — Path of Development Influences (Recovery in sight?)

But the Future is Uncertain For Now Signals Suggest a Plateau or Bumpy Ride Up

Not a Bursting Bubble

Thank You For Your Attention

Copy of Presentation And Contact www.csufcab.com