April 26, 2021

By Ben Palen, Ag Management Partners & Consultant, HighQuest Partners

The current market for farmland can be accurately described as one where there is a shortage of land for sale and a larger than normal number of potential buyers in many areas. While this article is not intended to be a deep dive into the reasons for this scenario, it is apparent that the commodity price boom that has occurred in recent months, and the increasing desire for preservation of capital by way of owning land, are playing large parts in the level of buyer interest.

Auctions are interesting phenomena. They can be unpredictable because many factors can be in the mix. These include:

~ location
~ level of local interest
~ price averaging
~ land quality
~ method of auction (individual tracts, or the combination method)
~ commodity prices and interest rates
~ overall buyer psyche
~ level of investor farmland ownership in the area

The Rother land auction of April 20th, which was conducted by Hall and Hall Auctions, consisted of the following approximate land classifications:

~ 19,215 acres of grazing land
~ 15,320 acres of non irrigated farmland
~ 1,803 acres of irrigated farmland

Included in the above acres were 1,956 acres leased from the State of Colorado. About two thirds of the total acres were located in Cheyenne County, Colorado, with most of the balance located in the adjoining county of Wallace, in Kansas.  

Wheat is the primary crop in this area, and over 95 percent of the cultivated acres are non-irrigated. Over the past 10 years in Cheyenne County, the wheat yield has ranged from about 20 bushels per acre up to 49, with an average of about 37. During this same time period, the average yearly price for wheat in Colorado has ranged from just over $3 a bushel to about $7.75. Wheat prices for harvest delivery in the area are about $6.70 a bushel now, while harvest delivery prices for corn and milo, are $5.46 and $6.01, respectively. Notwithstanding the dominance of acres planted to wheat, the last 20 years have seen a movement away from the long tradition of wheat/fallow farming, and more of a mix of wheat and summer crops (corn, milo, millet, sunflowers) in a no-till system. Undoubtedly, the improved farming practices, and the availability of good local markets for grain, have made a difference in financial results for area farmers. Crop insurance, and other risk management tools, have also helped area farmers.

Cash rents for non-irrigated land in the area are generally in the mid to high $20s per acre, and grazing land rents for $7-$9 per acre. Property taxes are about $1.80 per acre on cropland, and less than $1 per acre on grazing land. This suggests a cash on cash return of around 1.5 percent based on prevailing land prices in this area. 

Given the history of this area from a production standpoint, and considering that there is anecdotal evidence that climate change is adversely impacting this portion of the Great Plains, it is understandable why some institutional investors have tended to favor other regions for their purchases. When land in portions of the Corn Belt and Delta can be purchased to attain a cash-on-cash yield in the three percent range, one might be hard pressed to make the case for investing in an area such as the auction location. However, therein lie some truisms about the farmland market in the United States -it is full of nuances.

 While land buyers focus on current income potential from a piece of land that is for sale, there is no doubt that another key factor comes into play when pricing that land, and that is the notion of price averaging. It was not that many years ago that Cheyenne County land sold for $600-800 per acre. The overall cost basis for many farmers who have been in the area for decades is quite low. Hence, one means of their justifying paying X per acre for a new parcel is their overall average land cost. It is similar to the practice of stock market investors who build a position in a given company.  The difference, though, for land, and again this is based in part on conversations with several participants in the farmland fund sector, is that those participants do not use that method. In other words, each parcel must stand on its own. This can lead to instances, especially in an auction setting, where local farmers will outbid investors. Many of those farmers have tremendous land equity built up over the years, and when combined with low interest rates, it is not difficult to pencil out paying a higher price for land and using some leverage based on overall equity in the farming operation.

Turning to the auction, it had over 100 registered bidders and over 250 people in attendance. The bidders included a mix of local farmers/ranchers, and some investors. The method of sale was first to take bids on individual parcels, and then move to various combinations. Over the course of four hours the auction total price moved from just under $25,000,000, for the individual parcels, to just under $36,000,000, when the combinations were taken into account. 

For the individual tracts, there were sixteen initial bidders, and by the auction’s end, there were eleven successful bidders. One bidder, a large-scale owner of local farmland likely to manage the property themselves, ended up with over 31,000 of the total acres, or more than 85 percent of the total, for a price of $26,600,000. There was active bidding on various combinations from other bidders, but the winning bid for 85 percent of the acres topped the mix of other bidders only by about $400,000 – reflecting a healthy mix of competitive bidding.

While it is not possible to know how the winning bidders allocated their total bid price in those instances where they had multiple parcels, it would appear that the grazing land sold for about $550-$663 per acre, while the non-irrigated cropland averaged close to $1,600 per acre, and the irrigated land, about $4,000 per acre. 

Land auctions typically represent the best means of price discovery.  While private transactions dominate the farmland market, whether measured by acres sold, or dollar value, the fact of the matter is that other considerations can come into play on private sales, such as family relationships, prior landlord/tenant dealings, owner financing, and the like. An auction represents a level playing field of sorts when one is studying trends in land values.

It is noteworthy that the bids of local farmers were less than five percent lower than the eventual winning bid of the buyer who acquired most of the land. There was a good balance, and one would be hard pressed to say that the winning bidder overpaid for the land. It could also  be a reasonable assumption to believe that the winning bidder used the same price averaging technique that has already been noted in this article.  And, while there are trends of greater consolidation in most sectors of agriculture, in this instance, the land ownership post-auction ended up more dispersed than was the case prior to the auction.

The level of bidding activity, and its competitiveness, also speak to a positive long-term attitude about agriculture. While there is no doubt that current commodity prices had a favorable impact on the pricing, I do not think that lower commodity prices would necessarily have led to lower prices at the auction. The viewpoint of the bidders/buyers at this sale was no doubt long term.  Low interest rates no doubt also played a factor in the process.

On the face of things, and with reference to cash rents in relation to land values, the projected returns on this land appear low when compared to other regions where cash rents are common. However, it is likely that virtually all of the eventual successful bidders intended to operate the land directly.  Just as with the example of price averaging on the land itself, there is no doubt that greater economies of scale resultant from adding acres are part of the justification for increased land prices. It is possible, indeed quite likely, that the potential per acre returns from direct operation of this land by a farmer in the expansion mode, are substantially above the noted returns from a cash lease.

In conclusion, this well managed auction captured the essence of a competitive market for an asset class that is becoming increasingly attractive not only to existing farmers and ranchers, but also to investors. While investors still represent a tiny percentage of the overall land ownership mix in the United States, they have come to realize the security that farmland ownership represents. Also, the cash returns from it far exceed current rates on financial assets. There are the intangibles of owning a hard asset that have taken on new meaning for some participants in the market. 

**Acknowledgements—many thanks to Scott Shuman, of Hall and Hall, and Greg Talbert, a local farmer and longtime friend, for their perspectives on this auction. 

* All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, or parent company HighQuest Group.