2 pp.Farm income in 2009 will likely decline from previous years, and the value of rural land is likely to flatten out also. Producers need to increase their emphasis on financial and risk management

Klinefelter, Danny A.

Texas A&M University

Land Price Increases  
The strong uptrend in agricultural land pric-
es is likely to flatten out over the next year.
Whether values actually fall will depend 
on the length and depth of the recession 
in the general economy, how much farm 
income declines, and whether tighter credit 
and lower income increase the number of 
properties on the market. Any build-up in 
the inventory of properties for sale would 
obviously depress land prices. The effect 
would be compounded if able buyers elected 
to sit on the sidelines because they believed 
prices were going to go lower. The reality is 
that investor psychology is a very important 
factor in determining both the upside of bull 
markets and the downside of bear markets. 
In Texas, rural land values have been driven 
by crop land prices in the Panhandle and 
by the prices of recreational properties and 
smaller tracts around urban areas. If farm 
and general economic conditions continue 
to soften, the demand for these properties is 
likely to be smaller for some time. A decrease 
in the demand for crop land by investment 
funds and 1031 exchanges will be another 
*Professor and Extension Economist–Management, 
Texas AgriLife Extension Service, The Texas A&M 
System.
dampening factor on the rate of increase in 
rural land values. Overall, Texas rural land 
values have increased 10 to 19 percent an-
nually since 2003. That rate may be difficult 
to sustain in the current economic climate. 
If one assumes a continued average annual 
increase of 14.5 percent into the future, the 
median price of $2300 per acre as of mid-
2008 would increase to $4600 by sometime 
in 2013. Keep in mind the “Rule of 72,” which 
says that if you take the annual growth rate 
and divide it into 72, that’s how many years 
it will take for values to double. The current 
economic climate does not suggest this rate 
of growth is sustainable in the near term.
Reasons for Concern
Farm income in 2009 will likely decline from 
the record levels of 2006–2008. In part, this 
is the normal cycle in a commodity-based in-
dustry. Long periods of high income are not 
sustainable. The function of a competitive 
market is to allocate scarce resources among 
competing uses. If the market is efficient, 
the return to the average producer is driven 
to breakeven through supply and demand 
responses. Remember, the economic defini-
tion of breakeven is covering the opportunity 
cost of a return to owner equity capital, labor 
and management at what it could earn in its 
next best alternative use. When a market is 
Danny Klinfelter*
E-550
3/09
The 2009 Outlook for 
Texas Rural Land Values
Agriculture and the 2008 Credit Crisis
in equilibrium, only the top producers would actually 
earn a profit through superior management, while the 
producers at the bottom of the spectrum would be los-
ing money and exiting the industry. 
Several factors are coming into play that will put 
downward pressure on land values. The first is falling 
grain prices. High oil prices and a cheap U.S. dollar 
have driven grain prices up. If oil prices remain at less 
than $70 per barrel, if the dollar strengthens, and if the 
global economy weakens, then the price of ethanol and 
commodities produced for export are likely to decline 
in order to remain competitive. 
Part of the decline in commodity prices is occurring 
not just because of supply and demand responses for 
the basic products, but because many of the speculative 
funds that have accumulated large long futures posi-
tions over the last several years are liquidating those 
positions. Their rapid liquidation of those positions is 
currently putting excess downward pressure on prices.
While cheaper oil and a stronger dollar should help 
to slow or even reverse some of the increase in input 
prices, including rents, input prices usually decline 
more slowly than income. 
The second factor affecting land values is the tightening 
of credit. Creditworthy borrowers—those with strong 
financial positions and good income track records—
should still be able to borrow what they need. However, 
risk premiums in interest rates and down payment/
equity requirements are increasing, stronger capital debt 
repayment capacity is becoming more important, and 
loan terms are shortening.
If they don’t have problems in their investment portfo-
lios, independent banks that rely on local deposits to 
fund their loans may be in a strong competitive position 
at the moment; but, they are also limited by their source 
of funds and the size of loans they can handle internally. 
While they can make arrangements to participate with 
other community banks, eventually the loan pool will 
be used up. In part, this will occur as interest bearing 
deposits require higher rates to remain local and capital 
ratios become strained by additional loan demand.
The uncertainty in the financial markets and the eco-
nomic downturn are already causing lenders who com-
pete in the nation’s markets for funding and deposits to 
pay higher rates to attract those funds. The interest rate 
yield curve has changed from being relatively flat to in-
creasing significantly for longer term rates. Even though 
amortization periods of 15 to 25 years may still be 
available, prudent lenders are going to require shorter 
note maturities to keep their loan portfolios market-
able and to manage their own asset:liability price risks. 
Borrowers will likely find that it makes sense for them 
to shorten maturities as well, because fixing longer term 
rates will be significantly more expensive. 
Another factor that will cause interest rates to rise is the 
federal debt. About a third of this debt is held by foreign 
investors—e.g. China, Japan, oil exporting nations, etc. 
The slowing global economy will mean we have to pay 
higher rates to attract and hold those funds. The nearly 
trillion dollars of new debt needed to fund both the 
deficit and the bailout will also have some crowding-out 
effect; i.e., rates will go up as the government competes 
with the private sector for additional funds.
What Does It All Mean
The basic message is that producers need to increase 
their emphasis on financial and risk management. Now 
is not the time to be leveraging up or overcommiting 
debt repayment capacity based on the assumption that 
recent levels of farm profitability will continue over the 
next few years. Getting debt structured properly, im-
proving working capital and managing costs will be the 
best course. Managing downside commodity price and 
yield risk will be as important to sustainability as mini-
mizing taxes and trying to capture market highs. Last 
but not least, it is important to plan for next year soon 
and communicate with lenders earlier than in the past. 
Produced by AgriLife Communications, The Texas A&M System
Extension publications can be found on the Web at: http://AgriLifebookstore.org
Visit the Texas AgriLife Extension Service at http://AgriLifeextension.tamu.edu
Educational programs of the Texas AgriLife Extension Service are open to all people without regard to socioeconomic level, race, color, sex, disability, religion, 
age, or national origin.
Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and June 30, 1914, in 
cooperation with the United States Department of Agriculture. Edward G. Smith, Director, Texas AgriLife Extension Service, The Texas A&M System.


English

The 2009 Outlook for Texas Rural Land Values

Texas A&amp;M Repository

Land Price Increases  The strong uptrend in agricultural land pric-es is likely to flatten out over the next year.Whether values actually fall will depend on the length and depth of the recession in the general economy, how much farm income declines, and whether tighter credit and lower income increase the number of properties on the market. Any build-up in the inventory of properties for sale would obviously depress land prices. The effect would be compounded if able buyers elected to sit on the sidelines because they believed prices were going to go lower. The reality is that investor psychology is a very important factor in determining both the upside of bull markets and the downside of bear markets. In Texas, rural land values have been driven by crop land prices in the Panhandle and by the prices of recreational properties and smaller tracts around urban areas. If farm and general economic conditions continue to soften, the demand for these properties is likely to be smaller for some time. A decrease in the demand for crop land by investment funds and 1031 exchanges will be another *Professor and Extension Economist–Management, Texas AgriLife Extension Service, The Texas A&M System.dampening factor on the rate of increase in rural land values. Overall, Texas rural land values have increased 10 to 19 percent an-nually since 2003. That rate may be difficult to sustain in the current economic climate. If one assumes a continued average annual increase of 14.5 percent into the future, the median price of $2300 per acre as of mid-2008 would increase to $4600 by sometime in 2013. Keep in mind the “Rule of 72,” which says that if you take the annual growth rate and divide it into 72, that’s how many years it will take for values to double. The current economic climate does not suggest this rate of growth is sustainable in the near term.Reasons for ConcernFarm income in 2009 will likely decline from the record levels of 2006–2008. In part, this is the normal cycle in a commodity-based in-dustry. Long periods of high income are not sustainable. The function of a competitive market is to allocate scarce resources among competing uses. If the market is efficient, the return to the average producer is driven to breakeven through supply and demand responses. Remember, the economic defini-tion of breakeven is covering the opportunity cost of a return to owner equity capital, labor and management at what it could earn in its next best alternative use. When a market is Danny Klinfelter*E-5503/09The 2009 Outlook for Texas Rural Land ValuesAgriculture and the 2008 Credit Crisisin equilibrium, only the top producers would actually earn a profit through superior management, while the producers at the bottom of the spectrum would be los-ing money and exiting the industry. Several factors are coming into play that will put downward pressure on land values. The first is falling grain prices. High oil prices and a cheap U.S. dollar have driven grain prices up. If oil prices remain at less than $70 per barrel, if the dollar strengthens, and if the global economy weakens, then the price of ethanol and commodities produced for export are likely to decline in order to remain competitive. Part of the decline in commodity prices is occurring not just because of supply and demand responses for the basic products, but because many of the speculative funds that have accumulated large long futures posi-tions over the last several years are liquidating those positions. Their rapid liquidation of those positions is currently putting excess downward pressure on prices.While cheaper oil and a stronger dollar should help to slow or even reverse some of the increase in input prices, including rents, input prices usually decline more slowly than income. The second factor affecting land values is the tightening of credit. Creditworthy borrowers—those with strong financial positions and good income track records—should still be able to borrow what they need. However, risk premiums in interest rates and down payment/equity requirements are increasing, stronger capital debt repayment capacity is becoming more important, and loan terms are shortening.If they don’t have problems in their investment portfo-lios, independent banks that rely on local deposits to fund their loans may be in a strong competitive position at the moment; but, they are also limited by their source of funds and the size of loans they can handle internally. While they can make arrangements to participate with other community banks, eventually the loan pool will be used up. In part, this will occur as interest bearing deposits require higher rates to remain local and capital ratios become strained by additional loan demand.The uncertainty in the financial markets and the eco-nomic downturn are already causing lenders who com-pete in the nation’s markets for funding and deposits to pay higher rates to attract those funds. The interest rate yield curve has changed from being relatively flat to in-creasing significantly for longer term rates. Even though amortization periods of 15 to 25 years may still be available, prudent lenders are going to require shorter note maturities to keep their loan portfolios market-able and to manage their own asset:liability price risks. Borrowers will likely find that it makes sense for them to shorten maturities as well, because fixing longer term rates will be significantly more expensive. Another factor that will cause interest rates to rise is the federal debt. About a third of this debt is held by foreign investors—e.g. China, Japan, oil exporting nations, etc. The slowing global economy will mean we have to pay higher rates to attract and hold those funds. The nearly trillion dollars of new debt needed to fund both the deficit and the bailout will also have some crowding-out effect; i.e., rates will go up as the government competes with the private sector for additional funds.What Does It All MeanThe basic message is that producers need to increase their emphasis on financial and risk management. Now is not the time to be leveraging up or overcommiting debt repayment capacity based on the assumption that recent levels of farm profitability will continue over the next few years. Getting debt structured properly, im-proving working capital and managing costs will be the best course. Managing downside commodity price and yield risk will be as important to sustainability as mini-mizing taxes and trying to capture market highs. Last but not least, it is important to plan for next year soon and communicate with lenders earlier than in the past. Produced by AgriLife Communications, The Texas A&M SystemExtension publications can be found on the Web at: http://AgriLifebookstore.orgVisit the Texas AgriLife Extension Service at http://AgriLifeextension.tamu.eduEducational programs of the Texas AgriLife Extension Service are open to all people without regard to socioeconomic level, race, color, sex, disability, religion, age, or national origin.Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and June 30, 1914, in cooperation with the United States Department of Agriculture. Edward G. Smith, Director, Texas AgriLife Extension Service, The Texas A&M System.

http://oaktrust.library.tamu.edu/bitstream/handle/1969.1/87601/pdf_2712.pdf?sequence=1&isAllowed=y

The 2009 Outlook for Texas Rural Land Values

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The 2009 Outlook for Texas Rural Land Values

Abstract

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Full text

Available Versions

Texas A&M University

Texas A&amp;M Repository

Texas A&M Repository