Tighter commodity margins are likely to slow the pace of gains in farmland values in 2012.
So says Ken Keegan, chief risk officer for Omaha-based Farm Credit Services of America, which serves the states of Iowa, Nebraska, South Dakota and Wyoming.
“As we look at the basic fundamentals, there’s still a strong demand factor in the market, but certainly some signs that the commodity margins we experienced in 2011 potentially could be less than what we saw,” says Keegan, “and that should have a bit of a cooling effect in terms of rate of increase.”
But Keegan tells Brownfield he doesn’t foresee any major declines in farmland values.
“Our perspective is that there’s still good opportunities for our producers. Their balance sheets are, for the most part, strong—and they have risk-bearing ability to withstand some cyclical adjustments,” Keegan says. “So, based on that, we don’t forecast a huge pop of a ‘bubble’ that may have built.”
Keegan says continued low interest rates and a strong export market for ag products will help support farmland values—but he says, as margins tighten, the interest from outside investors may cool off a bit.
“The return to that investment is pretty moderate—in many cases, under three percent,” he says. “Now, I don’t know in terms of alternative investments—that also has an impact in terms of peoples’ decisions—but there are certainly not robust returns for farmland investments.”
Keegan says outside investors—those from outside of the community where the land was being sold—accounted for 11 percent of all farmland purchases in the Omaha bank’s service area in 2011.