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

2013 Fresno Agricultural Valuation Symposium: Bubble or Just the Beginning? The Economics of Farm Real Estate Value: A New Reality? Dr. Mechel S. Paggi Director, Center for Agricultural Business Wednesday, January 23, 2013

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 Do llars p er acre Change 1970-1980 Change 1980-1990 Change 1990-2000 Change 2000-2010 current $ ... +276% current $ ...... -7% current $..... +60% current $ ... +102% 2500 inflation adj. ... 77% inflation adj. ... -42% inflation adj. ... 21% inflation adj...+ 59% 2000 Even When Adjusted For Inflation 1500 Farm Real Estate (current dollars) 1000 Farm Real Estate 500 (inflation adjusted*) 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 *Inflation adjustor: price index for Gross Domestic product (2005=100); source: Dept. of Commerce, BEA

With A Diverse Regional Profile U.S. average increase 2002 to 2012 = 123% WA NH 54% VT ME MT ND 70% 200% OR MN 52% ID WI NY MA SD 183% 60% 112% 97% 271% MI WY RI 86% 41% PA IA CT NV NE 69% 258% OH IL 273% IN NJ 37% UT 90% 181% 154% DE -7 WV CA CO 82% VA KS 123% MO 71% 45% 84% 158% 126% KY 73% MD 80% NC 46% TN 51% OK NM AZ AR SC 116% 27% 52% 101% 58% AL MS GA 44% 71% 88% TX LA 94% Change from 2002-2012 78% FL less than 60% 54% 60% to 120% 120% to 180% Over 180%

California Cash Rent Reflects Land Value Pattern

Is this Trend Sustainable? Fundamentals in Determining Agricultural Land Values

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

California Example 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 * 10 Year Treasury Note

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

Fresno County Example 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 * 10 Year Treasury Note

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

Interest Rate Influence

California Example 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 * 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 Farm Income FAPRI Baseline 2012

Interest Rates (Discount Rate) FAPRI Baseline 2012

Interest Rates (Discount Rate) Percent 9 10-year Treasuries 8 7 6 5 4 3 Federal Funds Rate 2 1 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Interest Rates (Discount Rate)

Central Valley Commodity Prices Prices received index (1990-92=100) 225 Change 2007 to 2012 200 All crops ........................ +63% Fruit & Nuts ................... 175 +10% Commercial Vegetables .. +9% 150 Potatoes & dry beans ..... +34% 125 Cotton ............................ +60% Feed & Oilseeds .............. 100 +88% Alfalfa hay …………………… 75 +55% All crops Fruit & Nuts Commercial vegetables Alfalfa Livestock and dairy ......... +19% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

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 over-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

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