Land boom leveling off?Expert says skyrocketing prices could stabilize as commodity supply catches demand.
By: Chris Mueller, The Daily Republic
MITCHELL -- From to 2011 to 2012, the value of cropland in South Dakota grew faster than almost anywhere else in the country.
According to the U.S. Department of Agriculture, the average value of cropland in the state increased 24.7 percent to $2,320 per acre.
That growth rate is the third highest in the nation, behind only North Dakota, 29.8 percent, and Kansas, 25 percent.
The average value of cropland in South Dakota has increased 65.7 percent since 2008.
“I think it’s a safer investment than being in the stock market,” said Wayne Gronseth, of Mitchell, on investing in farmland.
Gronseth, 51, owns farmland spread between Tripp County and southern Davison County, and has bought thousands of acres in the area since 2007.
When asked why he chose to buy more land, Gronseth was blunt.
“Because I want it,” he said. “It’s a good investment.”
With land values skyrocketing, even relatively expensive land can be a worthwhile investment. Gronseth purchased land several years ago in southern Davison County and northeast Douglas County for $2,200 per acre, a price some thought was too high, he said.
“People told me I was nuts,” Gronseth said.
He estimates he could sell the same land now for at least $6,000 per acre.
“A lot of things work financially, but a lot of people don’t have the guts to take the risk,” he said.
Bill Davis, chief credit officer with Farm Credit Services of America, said farm profitability will decline as supply catches up with the demand for farm commodities, and as a result, the price of farmland will start to decline.
Farm Credit Services of America is based in Omaha, Neb. and has an office in Mitchell. The company serves Iowa, Nebraska, North Dakota and South Dakota.
“Supply and demand tend to even out over time,” Davis said. “We’ve gone through a period here where demand (for crops) has rapidly increased,”
The need for farm commodities used to produce ethanol has driven domestic demand higher in recent years, Davis said. He estimated between 30 and 35 percent of last year’s corn crop was used for ethanol production. Just a decade ago, that number was below 10 percent, he said.
Strong markets for farm commodities abroad, especially in China, Canada and Mexico, have also boosted demand, he said.
Nationwide, corn production in 2012 fell to 10.7 billion bushels, a 13 percent drop from 2011 and the lowest total since 2006, according to the USDA.
That decline, caused largely by the drought, is having a troubling effect on ethanol plants, according to Mark Gross, president of the South Dakota Corn Growers Association. Some ethanol plants already have shut down due to the shortage of corn paired with high production costs.
“Some plants will have to shut down, but that will allow the others to make it,” Gross said.
Historically low interest rates have made the cost of long-term borrowing lower than in decades, which, paired with high demand for crops, has helped create very strong farm profits in the last three or four years, Davis said.
“The profit levels have created a lot of excess cash for many (farmers),” he said. “Many are investing in farmland.”
All those variables have led to an increase in the value of farmland, Davis said.
“We saw a long, steady, slow rise in values in the early 1990s,” he said, “and then a steep increase starting in 2006.”
If supply begins to catch up with demand, Davis said, profit margins for farmers should start to shrink and the value of farmland could start to decline. If interest rates also go up, the impact could be even greater, he said. Gronseth recognizes farmland values can’t go up forever.
“We can’t go up 25 percent every year,” he said. “It just ain’t going to happen.”
But even if values decline, most farmers need not panic, Davis said, as most have borrowed very conservatively.
“That will be able to sustain them financially if profit levels drop,” he said.
Gronseth is confident he could endure such a decline.
“I’m very aggressive on the land payments,” he said. “I’ve disciplined myself to put a lot of money into it.”
Gross said he is “cautiously optimistic” about the future of the farm economy, which will largely depend on what happens with the drought and whether Congress passes a long-term farm bill.
Davis recommends farmers “conservatively manage their financial position, thoughtfully manage their debt and aggressively manage their interest rates” to get through a decline in profitability and land values unscathed.