Gold:Cropland Ratio Suggests Stability in Farmland Values

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1 REIT buys Illinois farm ground. Farmland Partners, Inc. (FPI), one of the Real Estate Investment Trusts mentioned in our previous issue, announced at press time last week that it had entered into a purchase agreement to acquire approximately 22,300 acres of farmland in Illinois for a total purchase price of $197 million. The purchase consists of cash, common stock and common and preferred units in FPI s various operating units. Taking the total selling price and the approximate number of acres involved, the average purchase price per acre is $8,834 an acre. The seller was not identified. LandOwner has heard unconfirmed reports the ground involved is located northeast of Peoria. FPI states while no lease agreements have been entered into as of yet, the Company (FPI) intends to negotiate new lease agreements with the tenants who are currently farming the properties. The purchase increases FPI s holdings to nearly 100,000 acres. FPI says it expects the purchase to generate more than $6 million in revenue annually. The purchase agreement is expected to close in the first quarter of 2016, FPI states. November 19, 2015 Powerful Insight for LandOwners Vol. 36 Iss. 19 Gold:Cropland Ratio Suggests Stability in Farmland Values The chart below contains some potentially good news for landowners. It shows the number of ounces of gold required to purchase an acre of Illinois or Iowa cropland. It shows the economic relationship between gold and cropland is back in alignment. It suggests farmland values could stabilize or weaken in an orderly fashion over the next year rather than decline sharply. We take the average state value for Illinois and Iowa cropland as published annually by USDA Ounces Iowa Illinois Number of ounces required to buy an acre of farmland and divide that by the average price for gold for the month of June. We use June because that s when USDA conducts its farmland values survey. While not an exact science, the resulting figures reflect the relationship between the inflation protection of gold versus the inflation protection and income generation of farmland. That ratio has come back into the more normal range seen in the 1950s and early 1960s, when the price of gold was fixed, and also in the slow-growth years of mid990s to The return to this norm implies the market has discounted inflation fears completely and that it is the income from each asset that drives value. It suggests the farmland market has returned to the slow-growth years seen in mid990s to Implications: It suggests the once-overheated farmland market may correct slowly over time rather than with a steep, short-term 1980s-style decline. A slow correction gives both operators and landowners time to adjust to the new economic realities of low commodity prices and tight profit margins. Map Shows Where Farmland Demand May Be Weakest The projected sharp decline in net cash incomes is most likely to impact the Corn Belt and dairy states the hardest, based on the regional cash income forecasts from USDA shown below. USDA says the average net cash farm income (NCFI) is expected to decline nearly 20% in NCFI is cash available to service debt, pay family living expenses and make investments. It does not account for changes in on farm inventory, accounts payable, accounts receivable and depreciation. With that forecast in mind, farmers in the dairy states (Northern Crescent in USDA terms) are expected to see a drop in cash incomes of 40%. Leading the decline is dairy operations, which are projected to see a significant decline of 74% in NCFI in That follows an estimated 48% increase in Volatility like that coupled with the steep decline is likely to result in very weak demand for farmland in those states. The Heartland area is forecast to see a 25% cut in NCFI in 2015 due to decreases in income for corn, hog and dairy operations. This follows a 31% decline in The western areas of the region have undergone a correction in farmland values in both 2014 and 2015 as a result. Declines in the eastern areas are in their first year. The drop in NCFI helps explain the extensive talk of lowering higher-end cash rents, decreasing input costs and weaker farmer bidding at farmland auctions. The Mississippi Portal region is projected to see an 11% decline due to lower commodity prices. But its decline is only 44% of the decline for the Heartland, which helps explain the steady trend in farmland values in that region.

2 The value of good agricultural farmland across the central Corn Belt remained unchanged from a year earlier through the third quarter of 2015, according to a survey of ag bankers conducted by the Federal Reserve Bank of Chicago. However, the survey found key percentage swings between states that comprise the Fed bank district. The fed bank serves the northern two-thirds of both Illinois and Indiana, all of Iowa, the lower Peninsula of Michigan and southeastern Wisconsin. The survey found the value of Illinois farmland fell 4% on an annual basis and the value of Iowa farmland slipped 1% compared to the end of September Indiana bankers indicate farmland values are even with a year ago. But Wisconsin reports values rose 4% on an annual basis and Michigan bankers list a 5% increase in the value of farmland. Their gains and declines also vary from values reported at the end of the second quarter. Central Corn Belt Farmland Values Mixed For instance, Wisconsin reported a 2% decline on an annual basis at the end of June, compared to the 4% rise now indicated. Michigan is consistent with its most recent gain of 5%. That follows an annual increase of 6% reported at the end of June. Iowa seems to be moderating as it now indicates values are off 1% on an annual basis compared to the 7% annual decline listed at the end of June. Illinois reports a decline of 4% on an annual basis as of Sept. 30, which is only moderately less than the 6% annual decrease listed at the end of June. Indiana shows moderation as it now reports values are even with a year earlier while that state s bankers indicated a 4% annual gain at the end of June. Looking ahead, the survey found 52% of respondents anticipated a decrease in farmland values during the fourth quarter of Only 1% anticipated an increase. The survey also found agricultural credit conditions deteriorated during the third quarter due to lower commodity prices. Respondents indicate repayment rates for non-real-estate farm loans were down in the quarter versus a year earlier and loan demand was up. But the bankers indicated they expected to work through the weaker conditions with most borrowers. -2 Percent Change Quarter* Annual** Illinois 4% -4% Indiana -3 0 Iowa Michigan Wisconsin District +1% 0% Federal Reserve Bank of Chicago * versus previous quarter ** versus year earlier Varied Results Reported Between Regions Percent change from previous quarter Percent change from year earlier * insufficient response Federal Reserve Bank of Chicago Change by Quarters in Central Corn Belt '08 '09 '10 '11 '12 '13 Federal Reserve Bank of Chicago Values Unchanged from Year Ago October-September annual basis Federal Reserve Bank of Chicago * * '14 '15 LandOwner is published twice a month. Copyright 2015 by Professional Farmers of America, Inc., 6612 Chancellor Drive, Cedar Falls, Iowa Periodicals postage paid at Cedar Falls, Iowa. Postmaster: Send address changes to: LandOwner, 102 Mackinlay Dr., Webster City, Iowa Senior Vice President, Chuck Roth Editor, Mike Walsten Publisher, Chip Flory Markets Editor, Brian Grete Editorial Phone: landowner@profarmer.com Editorial correspondence: 6612 Chancellor Dr., Suite 300, Cedar Falls, IA ISSN number: Subscription services phone: Subscription: $249 per year LANDOWNER 2 / November 19, 2015

3 Cropland Values Weaken in Central, Southern Plains Cropland values across the Central and Southern Plains are steady to weaker, according to the Federal Reserve Bank of Kansas City. But the quarterly survey conducted by the Fed bank finds the value of ranch and pastureland are modestly higher. The fed bank s district covers Kansas, western Missouri, Nebraska, Oklahoma and the Mountain States of Colorado, northern New Mexico and Wyoming. The value of district cropland rose a scant 0.4% on an annual basis through the third quarter of 2015, the bank reports. That compares to an annual decline of nearly 3% recorded for the second quarter. District irrigated cropland slipped 1%, continuing the weakness reported at the end of the second quarter when the survey reported an annual decline of nearly 4%. Ranchland values, meanwhile, rose 7.6% on an annual basis. That gain follows an annual gain of nearly 9% reported through the second quarter of The survey revealed mixed land value trends from Percent Change by Quarter '09 '10 '11 '12 '13 '14 '15 across the bank district. The Mountain States reported an annual gain of nearly 7% in the value of non-irrigated cropland and slightly more than a 13% jump in the value of ranchland. Oklahoma reported cropland values remained virtually steady on an annual basis through the end of September, while the value of ranch and pastureland rose 9%. Nebraska bankers indicate the value of non-irrigated cropland rose about 2.5% on an annual basis, but the value of irrigated cropland slipped by about the same amount. They report ranch and pastureland values rose nearly 7%. Meanwhile, Kansas reported slight declines in the value of both non-irrigated and irrigated cropland and a 5% rise in the value of ranchland. Looking ahead, the sharp decline in farm incomes has, for the first time in six years, a majority of respondents looking for declines in the value of all three land types. In addition, 81% of the bankers reported a significant or modest deterioration in the overall working capital for crop producers, up from 65% in Percent Annual Change October-September annual basis Cropland Down 10% to Up 9% Ranchland Down 2% to Up 5% (Versus previous quarter) Non-irrigated Irrigated Ranchland Kansas -3.5% 1.1% -0.9% Missouri Nebraska Oklahoma Mtn. States* District Irrigated Cropland Values Ease 1% Ranchland Up Nearly 8% (Versus previous year) Non-irrigated Irrigated Ranchland Kansas -0.3% -0.7% 5.0% Missouri.6 n/a** 4.6 Nebraska Oklahoma Mtn. States* District % * Mountain States: Colorado, New Mexico and Wyoming Source: * Mountain States: Colorado, New Mexico and Wyoming Source: ** not enough data LANDOWNER 3 / November 19, 2015

4 Iowa: Iowa County October 29: 107 acres 7 miles south of Victor. Tract 1: 86 acres; 70 acres tillable; CSR (62.1 county average CSR2); $7,600 per acre. Tract 2: 21 acres; 7 acres tillable; balance wooded; $4,200 per acre. Troy Louwagie, ALC, Hertz Real Estate Services, Mount Vernon, South Dakota: Lincoln Co. October 20: 120 acres 3 miles southwest of Norway Center; 115 acres tillable; PI 60.3; $7,000 per acre. Souvignier Real Estate & Auction, Canton, Minnesota: Brown County October - private treaty: 73 tillable acres northeast of Springfield; CPI 86.8; $7,500 per tillable acre. Charles Wingert, Wingert Realty and Land Services, Inc., Mankato, Illinois: Adams County October 1: 79 acres 2 miles southeast of Quincy; 48 acres tillable; OPCY 141; balance rolling timber; $5,700 per acre. Sullivan & Son Auction, LLC, Carthage, Colorado: Prowers County October 6: 1,250 acres south of Granada; all in CRP; buyer to receive 100% share of 2016 CRP payments; $682 per acre. Craig Kerfoot, United Country - Rocking X Land Co. Ltd., Burlington, Iowa: Fremont County October 6: 40 acres 2.5 miles north of Sidney; 38 acres tillable; CSR (71.7 county average CSR2); $8,300 per acre. Jim Hughes Real Estate, Glenwood, Kansas: Norton County September 18: 150 acres northwest of Norton; 120 acres dryland cropland; balance grass; $3,375 per acre. Mike Bailey, Farm & Ranch Realty, Inc., Colby, $ Recent sales reported to... Here s a listing of recent sales reported to us by real estate brokers and auctioneers across the country. If you have recent sales you d like to share, call us at or us at landowner@profarmer.com. Nebraska: Lancaster County November 12: 94 acres on southwest edge of Lincoln within city limits; future development potential; 83 acres tillable; SRPG 65.4; $6,950 per acre. Doug Hansen, AFM, Farmers National Company, Omaha, Kentucky: Daviess County November 11: 210 acres north of Yelvington; 200 acres tillable; tobacco barn in good repair; Ohio River frontage; $7,200 per acre. Jim Goetz, Kurtz Auction & Realty Co., Owensboro, Iowa: Hancock County November 11: 80 acres northeast of Goodell; 77 acres tillable; CSR (78.7 county average CSR2); $9,900 per acre. Andrew Zellmer, Peoples Company, Clive, Illinois: Marshall County November 10: 122 acres southeast of Toluca; 118 acres tillable; PI 131 (147 maximum per Illinois Bulletin 811); $10,100 per acre. Offered as two tracts; purchased as a single unit. Mark Smith, AFM, Soy Capital Ag Services, Bloomington, Iowa: Lee County November 10: 57 acres west of Keokuk. Tracts 1 & 2: 44 acres; 37 acres tillable; CSR (53.7 county average); machine shed with shop and concrete floor; older home needing repairs; $7,300 per acre. Tract 3: 13 acres; 100% wooded; $2,700 per acre. Sullivan Auctioneers, LLC, Hamilton, Ill., Michigan: Barry & Eaton counties November 10: 413 acres north of Bellevue. Tracts 1-3 & 60; 409 acres; 366 acres tillable; 40 acres woods; grain bin; $4,407 per acre. Offered as eight tracts; purchased as a single unit. Two, 2-acre farmsteads sold for $41,200 each. Roger Diehm, Schrader Real Estate & Auction Co., Inc., Kendallville, Ind., Illinois: Vermilion County November 10: 80 acres north of Henning; all tillable; PI (147 = maximum); $7,600 per acre. Tim Busby, Wallace Land Company, Fisher, Indiana: Jasper County November 9: 379 acres 7 miles southwest of Rensselaer. 344 acres tillable; farmstead; grains bins; $7,414 per acre. Offered as six tracts; purchased as a single unit. Jim Hayworth, Schrader Real Estate & Auction Co., Inc., Monticello, Iowa: Jasper County November 7: 107 acres 4 miles northwest of Prairie City; 105 acres tillable; CSR (67.8 county average CSR2); $13,000 per acre. John Van Zee, Farmers National Company, Mitchellville, South Dakota: Hutchinson County November 6: 240 acres 10 miles southeast of Menno. Tract 1: 160 acres; 94 acres tillable; PI 63.5; 60 acres of pasture leased through 2016; older home in need of repair; $3,600 per acre. Tract 2: 80 acres; all tillable; PI 67; $5,400 per acre. Chuck Sutton Auctioneer & Land Broker, Sioux Falls, LANDOWNER 4 / November 19, 2015

5 Outlook Provided by Pro Farmer Energies Weekly Natural Gas Futures Natural gas prices remain pointed lower Nearby resistance is the downtrend near $2.40. A weekly close above it would signal a seasonal return in demand. Strong resistance is the June high at $ $2.955 Strong support is the October low at $ The market is oversold. $1.948 Natural gas: The U.S. Energy Information prices stimulating usage, which leaves them vulnerable to a cold snap. Funds hold the largest short posi- Administration (EIA) forecasts national natural gas production this year will exceed the 2014 record. This would be the fifth consecutive annual record high. EIA also said consumption would be record-large the sixth consecutive annual record for use. Traders are focusing on production more than low tion in five years on anticipation of still lower prices. A seasonal decline in stored natural gas is likely underway. A return to summer highs for futures would likely signal demand is overtaking supplies. Until then, the price downtrend since 2014 will continue. Wheat Weekly SRW Wheat Futures Strong dollar limiting export demand The October high at $5.31 1/2 is initial resistance. A push above that level would likely trigger a test of the long-term downtrend. The last reaction high at $6.17 1/2 would be tough resistance on an extended rally. $6.17 1/2 $5.31 1/2 The May low at $4.60 3/4 is key support. Violation of that level would open the downside to the 2010 low at $4.25 1/2. $4.60 3/4 SRW: USDA pegged SRW carryover at 142 million bu. versus its prior month projection at 171 million bushels. Demand for quality SRW wheat has been stronger than that for the other wheats. But the only real business is traditional buyers of U.S. wheat. Value buyers are still turning to Black Sea origin wheat. HRW: USDA raised its HRW wheat carryover forecast by 27 million bu., which explains why HRW futures have not been as strong as other wheats. In a role reversal, HRW futures are likely more reflective of feed wheat, while SRW futures reflect milling demand. LANDOWNER November 19, 2015 / Outlook page 1

6 Corn Weekly Corn Futures A pickup in export demand needed to put in a low Bulls need a close above the October high at $3.99 3/4 to signal a seasonal low is in place. The July high at $4.43 1/4 looms as tough resistance. A close above that level would suggest something has changed market sentiment. The August low at $3.46 1/2 is initial support. If that level is violated, bears would target a drop back into the long-term downtrend and a challenge of the 2014 low at $3.18 1/4. $3.18 1/4 $4.43 1/4 $3.46 1/2 $3.99 3/4 Corn: Traders sold futures into the Nov. 10 USDA reports on thoughts supplies would be pegged higher than the prior month. However, USDA raised supplies more than traders expected. Not only did the production estimate increase, but total use was also cut. Domestic demand is solid, as ethanol production in the latest week surged to its highest level since the week ended July 5. Production rose at a much faster pace than stocks, which suggests ethanol usage also surged this month. The futures market is more focused on the dollar and soft exports than strong domestic demand. Seasonals still suggest a post-harvest rally, but inspiring export news is lacking. Soybeans Weekly Soybean Futures Bears maintain the upper hand Bulls need a close above the October high at $9.19 3/4 to signal a low is in place. A close above tough resistance at $ /4 is needed to signal a potential trend change. A close below the September low at $8.53 1/4 would likely drop futures back into the long-term downtrend. The 2008 low at $7.76 1/4 (not labeled on the chart) would be next support. $ /4 $9.19 3/4 $8.53 1/4 Beans: Soybean basis has sped higher. The strength reflects light farmer sales. The nearby futures spread jumped last week to as much as a 9 premium, suggesting the market wants beans sooner rather than later. But futures have trended lower on concerns about large global supplies and the strong dollar. USDA reinforced bears with its Nov. 10 LANDOWNER November 19, 2015 / Outlook page 2 reports that showed larger supplies than traders had expected. But the market is oversold and seasonals still offer a post-harvest rally since November is normally the latest for such a low. The dollar has been soft against the Brazilian real since September, which should assist our exports, but for a strong seasonal trend to occur, demand news must improve.