With gross per-acre revenues for the 2014 corn and soybean crops down a forecast 19% and 23%, respectively, from the prior year’s crop, the slow inevitable correction in annual row-crop land values is underway.

Institutional investment returns in U.S. annual cropland shriveled to 6.3% (2.5% appreciation and 3.8% income return) in 2014, before management fees. That’s nearly one-third the 16.7% return reported in 2013, according to the National Council of Real Estate Investment Fiduciaries, an investment manager trade group in Chicago.

Six managers—Halderman Real Asset Management, Hancock Agricultural Investment Group, Prudential Agricultural Investments, UBS AgriVest LLC, TIAA-CREF’s Westchester Group Investment Management and public farmland REIT Gladstone Land Corp.—contribute data on 403 annual cropland properties valued at $3.02 billion. The managers typically lease the land to local farmers who raise a mix of corn, soybeans, cotton, alfalfa, peanuts, potatoes, rice, strawberries,vegetables and wheat.

Regionally, annual row cropland appreciation rates ranged widely in 2014, from up 8.4% in California and 6.7% the Oregon/Washington region, to down nearly 1% in Texas and off about 0.50% in the Corn Belt states of Illinois, Indiana and Ohio, according to NCREIF.

Permanent crop investments—driven by California almond and pistachio properties—continue to generate standout returns. For 2014, permanent crop properties posted a 21.1% return before investment fees. The double-digit return was comprised of 6.2% appreciation and 13.4% income return, based on 220 properties valued at $2.51 billion.

Investments in cranberry bogs—primarily in central Wisconsin—continue to suffer as large supplies pressure cranberry prices and crimp returns. The value of permanent crop properties in the Lake States region (Mich., Minn., Wis.) depreciated 11% in 2014—the fifth straight year of price declines. Permanent crop tracts in this region have depreciated 33% since January 2009, according to NCREIF data.

Last fall, the U.S. Department of Agriculture agreed to purchase up to $55 million in cranberry products, double its previous purchase, which was in January 2014. It is expected to absorb up to 68 million pounds of surplus cranberries. ■

© 2015 Farmland Investor Letter All rights reserved.

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With crop prices broadly lower than a year ago, farmers are focused on minimizing costs in 2015, rather than maximizing output. Growers are purchasing fewer and lower cost inputs. In addition, rental terms for some cropland are under pressure, according to the latest Fed Beige Book report.

Contacts in the Mid-Atlantic region report that agribusiness conditions were better than in the same period a year ago. In the southern Midwest and northern Mid-South, the winter wheat harvests are likely to be lower than average, largely reflecting planting delays in Illinois due to wet weather in October. The level of red meat output across the southern Midwest and northern Mid-South through November was below year-earlier levels, while hog and milk output in the key states of the Midwest was higher than expected during the reporting period.

Lenders in the Northern Plains expected farm incomes in the fourth quarter of 2014 to come in below the same period a year ago. Prices received by farmers in the Minneapolis District are down from the previous year for corn, soybeans, wheat, hay, and milk; prices are higher for cattle, hogs, eggs, and poultry. Growing conditions in the Central Plains were generally favorable in December, and crop prices rose modestly. The Kansas City Fed reports that wheat prices increased modestly amid global supply concerns about limits on Russian grain exports and lower production estimates in Australia.

In the Southern Plains, conditions improved slightly, but drought persists in portions of Texas. Some areas of the Southeast saw a moderate improvement in drought conditions. Dairy farm profits in the Pacific West increased significantly over the past year, but milk futures prices declined recently. Uncertainty regarding future water availability in California slowed new plantings of permanent crops.

U.S. Federal Reserve System Districts

Prepared at the Federal Reserve Bank of San Francisco and based on information collected through January 5, 2015. The Beige Book summarizes comments received from business and other outside contacts.

The following is a Fed region-by-region summary of farm sector economic conditions, starting in the Mid-Atlantic and moving west:

Richmond—Contacts report seasonal slowing since the previous Beige Book, although business conditions are better than a year ago. Several farmers reported that planting and harvesting were finished for the year, although harvesting completion dates were later than usual. Farmers in South Carolina and Virginia report no change in input prices in the past six weeks and say that output prices were generally unchanged.

Atlanta—The Southeast experienced varying degrees of drought ranging from abnormally dry conditions to a few areas of severe drought, some areas of Alabama, Georgia, and the Florida Panhandle saw some moderate improvement in drought conditions. Protein producers that rely on corn for feed report improved margins because of continuing low corn prices. The most recent cotton and orange crop forecasts are slightly higher than last season’s production.

Chicago—Corn and wheat prices rose during the reporting period, while soybean prices were flat. Wheat prices were up because of drought and cold snaps in areas producing winter wheat and because of limits by the Russian government on exports. The record harvest created concerns about sufficient crop storage space, but subsequent reports indicate sufficient space is available. Shipping delays have eased, allowing stocks to move more smoothly to end users. The late extension of beneficial tax deductions will give a boost to after-tax agricultural income in 2014. Low crop prices are prompting farmers to focus on minimizing costs instead of maximizing output in 2015; they are purchasing fewer and lower cost inputs. In addition, rental terms for some cropland are under pressure because farmers are not expected to make enough to cover their costs next year. Ethanol margins compressed with the drop in oil prices. Hog and milk output is higher than expected, leading to further price decreases. Cattle prices are little changed, but have turned more volatile.

St. Louis—As of late November, about 96% of the region’s winter wheat crop was rated in fair or better condition. On average, 81% of the winter wheat crop had emerged across the District. That is slightly below the five-year average progress rate for this time of year. The majority of the slowdown is due to planting delays in Illinois because of wet weather in October. Year-to-date red meat production in the District was nearly 9% lower in November 2014 than in the same month last year. This decline is driven primarily by lower production in Illinois, Indiana, and Missouri, which collectively produce around 89% of the region’s red meat output. Year-to-date coal production in the District was 2.8% higher in November 2014 than in the same month last year.

Minneapolis—Conditions remain mixed since the previous report, with livestock and dairy producers faring better than crop farmers. According to the Minneapolis Fed’s third-quarter (October) survey of agricultural credit conditions, 69% of respondents said farm incomes have fallen from a year earlier, while 63% reported decreases in capital spending. The fourth quarter outlook was weaker, as 81% of lenders expect farm incomes to fall, while 77% expect capital spending to decrease from a year earlier. Prices received by farmers in December are lower from a year earlier for corn, soybeans, wheat, hay, and milk; prices are higher for cattle, hogs, eggs, and poultry.

Kansas CityGrowing conditions were generally favorable in December, and crop prices rose modestly. Although some western areas of Kansas and Oklahoma remain dry, scattered rains have improved soil moisture in many parts of the District and the winter wheat crop is in mostly good condition. Wheat prices increased modestly amid global supply concerns due to limits on Russian grain exports and lower production estimates in Australia. Corn and soybean prices also rose modestly since the last survey period due, in part, to a slight downward revision in 2014 U.S. production estimates. In the livestock sector, weaker export demand for pork has put downward pressure on hog prices. High feeder cattle prices are prompting some producers to feed cattle to heavier weights to boost profit margins.

Dallas—Conditions improved slightly, but large portions of the state remain in drought. Harvesting has wrapped up for all row crops, except cotton, which has been slow this year and is nearing completion. Winter wheat has been planted and some areas look good with ample moisture received, while other areas need more rain to yield a decent crop and good grazing conditions. Cattle prices have declined slightly but remain near record highs. Dairy prices are markedly lower due to increased global production.

San Francisco—Conditions are mixed period. Lower petroleum prices are reducing the cost of gas and fertilizer. However, some farmers also face lower prices for their commodities. In some areas, restaurants are purchasing fewer vegetables. Dairy farm profits increased significantly over the past year, but milk futures prices have declined recently. Uncertainty regarding future water availability in California ha slowed new plantings of permanent crops. ■

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Publicly traded cropland investment company, Farmland Partners Inc. (FPI) completed its previously announced $27.5 million cash purchase of seven row-crop farms located in South Carolina totaling 6,819 acres on December 22, according to a regulatory filing. The Company has leased back the largest of the farms to the seller for three years and struck multi-year leases with third-party tenants on the remaining acreage.

At the same time, Farmland Partners doubled its borrowing capacity with the Federal Agricultural Mortgage Corp., known as Farmer Mac, to $150 million from $75 million.

Farmer Mac is allowing Farmland Partners to lever its land purchases up to 60% via interest-only loans at a time when most surveys indicate that cropland value trends are flat or declining, and cite further downside risk due to the negative outlook for row-crop farming profits. Under the Farmer Mac agreement, Farmland Partners has borrowed $70.5 million at an average fixed rate of 2.49% for three years. ■

© 2014 Farmland Investor Letter All rights reserved.

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