At the 59th annual ABA Agricultural Bankers Conference in Indianapolis, IN, sessions and hallway discussions concerning land values were front and center. In the U.S., farmland values have doubled since 1990 in real terms. Discussion with the Canadian bankers attending the conference confirmed that the same trend is occurring in many provinces. From a global perspective, British farmland has increased 135% over the past decade.
Have these paper asset gains outpaced reasonable growth expectations? My friend, Michael Boehlje, a well-respected ag economist at Purdue University, suggests that when compared to stock valuations, the answer is obvious. Historically, the typical price to earnings ratio (P/E ratio) is 18. Compare this with farmland values, which are currently at 30, considerably higher than the normal comparison.
Also, these gains have outpaced food prices as well as commodity prices in some areas. Let us compare farmland to gold bullion prices. Since 1919, farmland has cost approximately 2.4 ounces of gold/acre. This year, the ratio nationwide is 1.6 ounces/acre. A first look, one may draw the conclusion that farmland is undervalued. However, it may be that gold in comparison is too expensive.
Many lenders at the conference expressed that they are taking a conservative approach to financing land. Established price limits per acre or reduced loan-to-value ratios were the methods employed to reduce risk.
Everyone was asking, “How much longer can the good times last?” Our trading partners, particularly the BRICS nations of Brazil, Russia, India, China, and South Africa, could hold the keys to commodity prices, interest rates and trade negotiations, along with other aspects to consider.
Regardless, one banker stated the following at a social: “Historically, producers have been asset rich and cash flow poor. Today, they are asset richer and flush in cash flow, which if not managed in a disciplined manner, could be a cocktail brewing for a possible long hangover.”
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.