Our Fall 2018 newsletter is available now. Click the link to download it
(Boone, IA, August 29, 2018) – Prices paid for Illinois farmland continued the “slightly lower” trend according to the Mid-Year Snapshot Survey completed by the Illinois Society of Farm Managers and Rural Appraisers. The survey results were released at the 2018 Farm Progress Show.
“In the first half of the year the value of Excellent quality farmland is down two percent and Average quality land is down one percent ,” says David Klein, AFM, ALC, Soy Capital Ag Services, Bloomington, IL., and overall chair of the Farmland Values program sponsored by the Society. “According to our member survey, prices being paid for Good and Fair quality land prices are very similar from the beginning of the year.”
Klein notes that the survey results indicated the state-wide average price for Excellent quality land by mid-year dropped roughly $200 per acre to $10,522 from the beginning of 2018. Survey results indicated prices for other land classes were estimated to be down less than $100 per acre respectively.
“Our survey somewhat confirms the survey from the Federal Reserve Bank of Chicago released earlier this month, which showed prices level to lightly higher in the first half of 2018, and is an indication of both the somewhat level nature of prices paid, and regional bias of each group’s respondents”, says Klein. “Location and local ownership continues to be a major factor in the strength or weakness of many areas”.
This is happening when fewer acres are changing hands, and majority of respondents expect that to remain the case into the last half of 2018.
Cash Rents to Nudge Lower
University of Illinois’ Gary Schnitkey, Ph.D. who coordinates the survey, indicated respondents expect cash rents to also trend slightly lower, depending on soil classifications.
Excellent — $305 per acre to $290
Good — $265 per acre to $250
Average — $220 per acre to $ 210
Fair — $185 per acre to $175
The type of rental agreements are varied and split into these primary categories:
Share Rent leases – 31 %
Modified Share Rent leases – 13%
Cash Rent leases – 30%
Variable Cash Rent leases – 21%
Custom Farming – 5%
The Mid-Year Snapshot Survey is conducted each year in July as an addenda to the much more comprehensive annual Land Values and Lease Trends Survey, also sponsored by the Society. The results of the year-end 2018 Survey will be released at the 2019 Illinois Land Values Conference which will be held March 21 at the DoubleTree by Hilton in Bloomington, IL.
Note: In the above release, reference is made to different qualities of farmland. In a normal year, Excellent quality farmland averages over 200 bushels of corn per acre with a soil productivity index of 133 or higher, Good quality farmland averages between 170 and 200 bushels per acre with a soil productivity index of 117-132, Average quality farmland averages between 150 and 170 bushels per acre with a soil productivity index of 100-116 and no irrigation, and Fair quality farmland averages below 150 bushels per acre with a soil productivity index under 100 without irrigation.
David Klein, General Chair
Vice President & Managing Broker
Soy Capital Ag Services
6 Heartland Drive
Bloomington, IL 61704
Gary Schnitkey, Ph.D.
University of Illinois
300a Mumford Hall
1301 West Gregory Drive
Urbana, IL 61801
Update: our 2018 report is now available as a free download!
(Bloomington, IL, March 22) Prices being paid for high quality Illinois farmland, as well as cash rents have stayed essentially flat for the past 12 months according to the 2018 Illinois Farmland Values and Lease Trends Report released today by the Illinois Society of Professional Farm Managers and Rural Appraisers at the Illinois Land Values Conference held here. The Report is based on an annual survey of the Society’s members and others allied to the industry and reflects activity from 2017.
“The news is there is isn’t much new regarding land values or changes in rents being paid for farmland,” says David Klein, AFM, ALC, with Soy Capital Ag Services and overall chair of the annual Land Values project sponsored by the Society. “Prices paid for Excellent quality farmland across the northern part of the state were down 1-2 percent with ranges from $10,500 to $11,000 per acre across the various regions of the state. That same type of land in the central part of the state was going at $10,350 to $11,400 per acre in the past year. This was flat-to-down 5 percent in certain areas.
“In the southern regions of the state there was really no movement at all in terms of drops or increases in prices for land. It was going from $8,000 to $10,885 per acre in the same areas as it was a year ago,” he explained.
A similar trend was true of cash rents being paid for the same Excellent quality farmland. “Projected rents remained relatively steady all across the state,” he said. Rent prices ranged from $295 to $325 per acre in the northern part of the state; $300 to $350 per acre for the central region, and; $160 to $325 in the southern counties.
Klein notes the statewide average prices being paid for Excellent farmland have dropped from their peak of approximately $12,500 per acre in 2013. “Comparatively, though, the average price paid for this same farmland in 2002, 15 years ago, was a little over $3,400 per acre,” he noted.
Some Things Don’t Change
Klein says the profile of the buyers of farmland has not changed in many years with farmers accounting for 62 percent of that group. “They know the value as well as, if not better than, anyone else and they are reinvesting into their own farm businesses. Investors, local and otherwise, are the second largest group of buyers accounting for 23 percent of the sales.
“Estate sales still lead the way as the greatest reason for a property to come on the market,” he explains. Private treaty is still the most popular way of selling land (49 percent) followed by public auction (35 percent). “It’s interesting to note how little this changes with time,” Klein adds. “In 2003 our report indicated that private treaty accounted for 50 percent of sales and public auction was at 32 percent.” As with rent rates, prices being paid for the land are based primarily on commodity prices. “It’s one of the ironies of agriculture – often the higher the soil productivity, the lower the cash return. But this also often carries with it lower risk, and improved asset price stability,” he says. “Our surveyed members believe the primary factor that could cause a drop in farmland prices of more than 5 percent would be falling commodity prices because of good growing condition in the United States.” He notes, however, that an increase in interest rates could also impact demand, and cause prices to drop. “Keep an eye on grain prices, interest rates, and governmental policy changes over the next 12-24 months for further direction in where the farmland market may be headed. What feels like a market that should be getting softer, may not happen because of general economic reasons. Conversely, there may be some real opportunities for investors to purchase productive land that could use some improvements during moments of uncertainty.” Klein says.
Rent Rates Staying the Same
For Excellent quality farmland, traditional crop shares had average income of $193 per acre, cash rent had $230 per acre, and custom farming had $253 per acre, says Dr. Gary Schnitkey, University of Illinois Department of Ag and Consumer Economics. Across all productivities, a straight crop share lease had the lowest returns. Cash rent and custom farming had returns near one another for the Good, Average, and Fair land classes.
There is a great deal of variability in cash rents for a given land productivity, he notes. “For example, the average cash rent for the mid 1/3 group on Excellent quality farmland is $298 per acre. The high 1/3 of leases averaged $317 per acre, $19 higher than the mid 1/3 group. Similarly, the low 1/3 group averaged $258 per acre, $40 lower than the mid 1/3 group. From the high 1/3 group to the low 1/3 group, there is a $59 per acre difference in average rents for Excellent productivity farmland. Similar ranges exist across Good ($53 from the high 1/3 to low 1/3 averages), Average ($49 per acre), and Fair ($50 per acre) productivity classes.
“Fifty-eight percent of respondents expected 2019 cash rents to remain the same as 2018 cash rents,” he explains.
The complete 2018 Illinois Land Values and Lease Trends Report is available for purchase in hard copy. The 124-page document includes region-by-region farmland sales data and also features year-over-year trend lines with numbers of properties sold, sales prices and median sales price data.
The ISPFMRA is one of 37 chapters of the American Society of Farm Managers and Rural Appraisers. The Illinois chapter, now celebrating its 90th year, is the oldest and largest state organization of its kind in the United States. Members are professionals devoted to the management and appraisal of rural property and agricultural consulting.
Join your colleagues for a very full day and a-half of touring, learning, gabbing and just plain having a good time in the Decatur/Assumption/Pano area on August 9-10. You can register and pay online using the form at the bottom of this page. Or you can print the PDF version of our agenda and registration form and mail us a check.
2018 ISPFMRA Summer Tour Agenda
Thursday, August 9
(All tour activities will begin and end at the Decatur Conference Center, 4191 US Hwy 36 West, Decatur, IL)
• Ingram’s Soil Testing Lab, Sullivan, IL
Ingram’s Soil Testing Center has been providing quality soil sampling and testing services to clients in Illinois, Indiana, Michigan and Missouri since 1979. Their services include taking GPS soil samples, testing soil for nutrients, creating field map books and fertilizer spread maps. Introduction of the Global Positioning System during the early 1990’s allowed to ISTC to expand the business to include quality GPS soil sampling services. The company added a second sampling and testing location in Athens, in 1996.
• DIGS Associates, Moweaqua, IL.
These are THE drainage specialist across Illinois and will be providing an up-close look at:
• Drainage History – Then and Now • Drainage Law – What’s Legal
• Drainage Materials – Evolution of Tile • Drainage Equipment – Techniques and Methods
• Comprehensive Watershed Drainage Analysis • Working with Neighbors – Mutual Mains
Lunch, courtesy of DIGS Associates, will be served at their facility.
• GSI Grain Handling Equipment Manufacturing, Assumption
This is an encore tour for the Illinois Society having been here over 10 years ago! GSI grew from a small, l;ocal provider of
corrugated steel storage bins in 1972. Today it is the world’s largest manufacturer of steel farm bins, commercial storage grain bins and grain silos providing equipment and services to customer in over 70 compines worldwide.
• Sloan’s & Sloan’s Express, Assumption, IL.
No matter what the ag product or its color, Sloan Express rightfully calls itself America’s Ag Parts Supplier. Selling directly to farmers, implement dealers and repair shops, its catalog has over 75,000 items. Orders in by 2 p.m. ship the same date with guaranteed next-day delivery anywhere in Illinois. Could this be Ag’s version of Amazon?
• Arpeggio Winery, Pano, IL.
Arpeggion wines are wines with rhythm — Beginning in 2008, the Swiney Family planted a two-acre vineyard consisting of two varieties, Norton and Traminette. Their journey from grapes to wine has led them to the restoration of their centuryold barn called Arpeggio Winery. All of the wines are named after musical terms. Tonight you can sample some of their wines and relax to a specially-catered dinner.
Friday, August 10
• Marketing with ADM
Breakfast with guest speaker — A plated breakfast will be served following by a presentation from Sam Elmore, a merchandiser with ADM. He will review his role in buying whole trains, getting them loaded and shipped across the U.S.
• ADM’s Railyard — A behind-the-scenes tour
The group will travel by motor coach (no private vehicles allowed) to the ADM railyard and intermodal yard with a presentation on the day-to-day management of the facility including plant switching, rail car storage and contractor relations. Your host will be Gary Davis, senior operations manager ADM Rail.
ISPFMRA Summer 2018 Tour Committee: Roger Leach, AFM, AAC, CCA; Keith Waterman, AFM, ALC; Max Hendrickson; and Brady Evans and Brad Davis, both with U.S. Bank Farm Management.
Contributors: Seth Baker, Dave Klein, Bruce Sherrick, and Brad Haight
It is important to understand the impact on farmland values of wind and other renewable energy projects. In this article, some empirical evidence is first provided from a sample of farmland sales with wind lease provisions and general comparisons to other sales made. Then, a set of important issues in evaluation wind lease payments is provided. Finally a simple stylized model is shown to help guide evaluation of wind lease payments that accompany a farm property.
With 27 wind projects of over 50 megawatts currently online, Illinois is a leader in wind energy in the United States. Only five other states produce more wind energy than the 4,026 megawatts installed in Illinois. Mendota Hills Wind Farm in Paw Paw was the first utility-scale wind project in Illinois starting in 2003. Others quickly followed, including Twin Groves Wind Farm in McLean County in 2008 which was the largest wind farm east of the Mississippi River upon completion.
Now 15 years since the early projects began, there is significant data to show added value to the farmland where the towers sit. David Klein, Managing Broker of Soy Capital Ag Services, has been tracking data from three wind farms in Central Illinois’ McLean, Woodford and Livingston Counties over the past ten years.
During 2009-2016, there were 22 sales of farmland in this area with wind lease income averaging $102 per acre across those sales. These were compared to general farmland sales to determine the impact on values, which shows an average $1,162 per acre increase on the farms containing wind power payments.
The typical income capitalization rate, or CAP rate for short (investor expected rate of cash return) is between 2.5 to 3.5 percent for good quality, central Illinois farmland. The capitalization rate for the wind lease payments, based on the data above, was approximately 9 percent. This may represent a significant opportunity to increase overall farmland returns where wind energy payments exist, though there are many considerations in evaluating the total impact on values of energy lease payments.
While the direct economic benefit to the landowner from lease payments is often the most evident effect, there are other issues that also impact the value of the underlying farmland. A partial listing of some other factors and considerations includes:
- Operating around the towers can make farming more difficult, both for field level operations and for improvements including drainage structures and irrigation.
- Noise, vibration, and shadow flicker issues may be a concern, and there are not fully unified requirements for setback or accommodation of externalities from location to location.
- Land is generally viewed as permanent and non-depreciating, but the length of remaining payments and potential decommissioning issues have shorter durations than the underlying asset.
- Aerial crop protection can be severely affected when there are turbines on a farm. While spraying near wind turbines can still be completed, it is notable that turbulence created by turbines can change wind flow for up to two miles.
- Not all of the farming issues are necessarily negative. Turbine access lanes around the farm can be a benefit to the farmer and the landowner when placed in efficient locations. The access roads leading to the turbines can provide safe and convenient parking for semis and equipment used during planting and harvest, and in many projects, the gravel lanes also provide a payment back to the farm as well.
- It is important for township and county officials to require wind energy companies to improve public roads upon completion of each project. Consideration for road damages may also need to be included in the accrued decommissioning costs of the turbine removal process.
In addition to farmability issues, lease terms and contract details vary a great deal across projects, and can have a substantial effect on the valuation of the lease. Some additional factors to consider in evaluating the desirability of wind projects and terms of the associated leases include:
- The general landscape change often impacts other local residential residents. Concerns are often voiced over proximity to avian wildlife patterns and activities related to hunting and use of other natural amenities. Liability limitations and operations-based indemnity provisions, subrogation waivers and insurance protections are all legal matters that concern those within the legal profession working with landowners. Questions about residential values in areas of turbines occur, especially during periods of construction, and whether those neighbors should also be compensated.
- Generating equipment is becoming larger and more efficient. While these changes will lead to fewer turbines required to produce the same amount of electricity, it also increases single turbine landownership participation risk. With the increasing size of turbines questions have been raised as to the potential vibration, noise (decibel levels) and shadow flicker from longer blades. The industry continues to evaluate and attempt to address the issue with blade modification and other engineering improvements, as well as set-back requirements from non-participating residential neighbors and participating farmsteads. Some county boards are requiring larger set-backs than those required by the state, which increases the difficulty of development.
- The method by which the power purchase agreements (PPAs) are made and determined could impact which projects survive, and which projects end prematurely. Importantly, it may also be possible to include royalty or generation bonus payments based on the nature of the PPA so that in addition to a fixed payment for the land used, a payment based on the amount of generated power could be retained by the land owner.
- Decommissioning security is another area of concern for all wind (and solar) developments. The state of Illinois demands certain minimal requirements for decommissioning. However, the question often arises as to whether the time to decommission is too generous, whether economic levels are adequate, are they properly funded, and should the frequency for updating the values be increased. Concerns exist with what will happen to the turbines if and when the project ends and energy production ceases. Because there has not been a wind project decommissioned in Illinois at this point, it is difficult to guarantee that the decommissioning will be handled properly. County zoning officials may want to consider requiring increased frequency in the evaluation of decommissioning costs to new projects beyond those required by the state.
- The ability to separate wind lease payments could provide more insight into their value, but this is still an issue in its infancy with no clearly defined markets yet.
- Interpretation and valuation by the lending community is also critical in accurately accounting for and accommodating the value of lease payment contracts. As lenders become more comfortable and experienced with the payments from wind leases, the amount they are willing to lend should increase as well. Lenders’ comfort levels with wind leases should also increase as the industry matures and improves the understanding of income stream correlation to the farmland value. There are specialized firms that help bridge the gap between the legal and financial components to help landowners accurately and completely evaluate lease payments.
Determining the value of a wind lease on farmland in a newer project with limited sales data is challenging. While data from prior, more established areas can be used to help determine the factors that matter to buyers and provide insight into possible values, current capitalization rates are changing, and the aging of guaranteed payments, along with decommissioning or risk funding payments, may differ.
To help understand the implications, a simple tool was developed that combines the farmland lease or income with lease payments and the potential for a risk or decommissioning fund payment to identify basic starting positions, and also to allow sensitivity tests to be easily performed against any of the entries. In the case shown below, a farm is being evaluated with different cap rates applied to the farmland return series, the lease payment series and a sinking fund accumulation for end of lease risk.
For concreteness, assume that the farm generates lease payments of $335/acre per year and has property tax obligations of $40/acre per year. The farm owner’s discount rate is 4 percent and the cash payments (income and taxes) are expected to increase at 1 percent per year. The wind lease payments are $102/acre per year and have a 20-year remaining life, with an escalation of 2 percent and a required discount rate of 9 percent. The owner also has a desire (or requirement) to include a set aside into a sinking fund for end of lease contingencies and is funding that at $10/acre for each of the remaining 20 years, in this case to correspond to the end of the lease payments. The discount rate applied to that stream is 5 percent. Each of these entries can be adjusted to determine the impact on each of the value contributions, and thereby the total as well.
Given these starting values, the farm could be valued at $10,780 and be consistent with these initial conditions.
A price higher than that would drive down the yield on the investment and a price lower would be consistent with higher capitalization rates for example. Following the table, a simple sensitivity matrix is provided that compares the values of capitalized payments across different levels of cash flow and discount rates. That table is also tied to the elements of the evaluation model and shows results for the life chosen for the remainder of the lease payments (in this case 20 years) If interested, the spreadsheet used to generate these tables can be downloaded here.
This analysis is very simplified and stylized for the most basic case, but still can be useful to understand how changes in payments, capitalization rates, and length of terms can affect the value of wind lease payments on a farm’s value. For more realistic valuations, a professional familiar with the specific terms and conditions should be consulted.
As the market becomes more efficient in dealing with the lease payment analysis, the value to all farms may, in fact, increase. Answers to the unknown will also provide comfort in investing in land with wind and other alternative energy sources. Additional data, research and professionals in the farmland industry will help fill the knowledge gap to provide better answers in the future.
About the Authors:
Seth Baker, AFM is Owner and President of Field Level Agriculture, and can be contacted at, Field Level Agriculture, Inc., 505 Broadway, Suite A, P.O. Box 169, Mt. Zion, IL 62549, (217) 329-4048, seth@fieldlevelag. com.
Dave Klein, AFM, ALC is Vice President of Soy Capital Ag Services and Managing Broker, and can be contacted at #6 Heartland Drive Suite A, Bloomington, IL 61704, 309-665-0961, www.soycapitalag.com.
Brad Haight is the founder of LeaseGen, LLC. LeaseGen values wind and solar lease revenue streams for buyers and seller of property where turbines or solar equipment is installed. LeaseGen also helps owners structure the economic provisions of their wind and solar leases,with a focus on long-term value creation. He can be contacted at: email@example.com or by phone at 720-509-9011, www. leasegen.com.
Bruce Sherrick, Ph.D., is currently the Marjorie and Jerry Fruin Professor of Farmland Economics, and director of the TIAA-CREF Center for Farmland Research in the Department of Agricultural and Consumer Economics at the University of Illinois. He can be contacted at University of Illinois College of ACES, 217-244-2637
The 2018 Illinois Farmland Values and Lease Trends Report is coming — and you can make sure you get your copy as soon as they’re released. They’ll be available on March 20, and you can pre-order here. You’ll be billed later when the reports ship.
The cost is $15 (for 1-5 copies). This includes shipping. If you order 6 or more copies, you’ll pay $10 each (plus shipping).
You can also order by the case (30 copies) for only $10 each. Shipping is $20 per case. To order a case, simply check that option below and hit “Submit” to place your order.
To order by mail, download and print one of these forms:
Daniel Legner, ARA, (left, front) heads up the 2018 leadership team of the Illinois Society of Professional Farm Managers and Rural Appraisers. He and the other officers were elected during the organization’s Annual Meeting held February 8 in Champaign, IL. Other members of the team are, right, from Legner: Rob Woodrow, AFM, president-elect, Farmland Solutions, LLC, Sherman, IL; Gary Schnitkey, Ph.D., secretary/treasurer, University of Illinois, Champaign. In the second row are, from left: Maria Boerngen, Ph.D., academic vice president, Illinois State University, Normal, IL; Seth Baker, AFM, vice president, Field Level Agriculture, Mt. Zion, IL, and; Eric Wilkinson, AFM, immediate-past president, Hertz Farm Management, Kankakee, IL. Legner is Senior Certified Appraiser with Compeer Financial (formerly 1st Farm Credit Services) in Princeton, IL. He received his Accredited Rural Appraiser designation from the American Society of Farm Managers and Rural Appraisers in 2005.
Ernest D. (Ernie) Moody, AFM, ARA, AAC, (right) was inducted into the Hall of Fame of the Illinois Society of Professional Farm Managers and Rural Appraisers at the organization’s annual meeting held February 8 in Champaign, IL. Making the presentation is Richard Hiatt, AFM, ARA, immediate past-president of the organization.
Moody is the 49th recipient of the honor which is given to members for their “outstanding service above and beyond.” In addition to serving as the Society’s president in 1996, he has chaired numerous committees and served on more. He is a co-founder of Heartland Ag Group of Springfield. The presentation coincided with the 90th Anniversary celebration of the society which was founded on the University of Illinois campus in 1928.
If you joined us for our 2018 annual conference, thank you! We hope you enjoyed our gathering — and our celebration of the ISPFMRA’s 90th anniversary — as much as we did. Stay tuned to this space for presentations, photos, and more from our conference.
Celebrating Our History
(View the high-quality video file here or right-click and save to download the file.)
Download our PowerPoint presentation for more about the ISPFMRA’s history.
Join us on March 22 for our annual Illinois Land Values Conference! Speakers include Dr. Bruce Sherrick of the University of Illinois; David Klein, AFM, AFC, of Soy Capital Ag Services; and Dr. Gary Schnitkey of the University of Illinois. Dr. Dave Kohl, Professor Emeritus, Virginia Tech, will deliver our keynote presentation.
You can get details in the form below. Registration is $70 for ISPFMRA/RLI members and $85 for non-members.
To register online, go here, then scroll down to the March ISPFMRA events.