Concerns about ag land sales
Progressive Farmer | 1 Novemebr 2021
Concerns about ag land sales
by Victoria G Myers
(DTN/Progressive Farmer photo by Jim Patrico)
Farmers aren't the only ones snapping up land in today's hot real estate market. Institutional investors and foreign countries alike increasingly see U.S. farmland as a sound investment.
While foreign investors are reported to own less than 3% of America's food-producing soil, according to USDA statistics from 2019, concerns continue to mount about who is actually buying up acres during this most recent "land rush" across agriculture.
Today, many states have rules placing some form of barrier to foreign or corporate ownership of farmland. Anecdotally, there's little evidence that limiting the buyer pool has limited sellers' financial gains.
Iowa, for example, has historically protected ownership and control of its highly valued farmland. Current law in the state says a nonresident alien, foreign business or foreign government cannot acquire or purchase land in the state. Yet, to look at USDA data tracking Iowa's land values, it doesn't appear hefty price tags for the state's farm ground have been limited by the regulation. Between 2020 and 2021, USDA reports Iowa's increase in cropland values exceeded the national average of 7.8%, coming in at 8.9%.
ASTRONOMICAL PRICE JUMPS
Jim Rothermich agrees there's been an increase in Iowa's land values, but he says it's a lot more than the USDA report indicates. The vice president at Iowa Appraisal and Research Corp. tracks all land auctions in the state. He reports that from January to the end of June 2021, land prices at auction were up an amazing 25%.
"That is statewide, over 23,900 acres, with weighted CSR2 (Corn Suitability Rating 2) of 74.4," Rothermich explains. Scale on the index goes from least-productive soils for row crops at 5 to most productive at 100.
The analyst says the 2020 land market was mostly flat until the end of October. Slow increases marked November and December. After that, Rothermich says "it exploded." He believes strong grain prices played a key role in the rally, as did better-than-expected 2020 yields for many producers in the state.
"We have buyers in this market we've never had before," Rothermich adds. "People who have never owned land think it's a good investment to be in. And, while we'd seen an increase in our buyer pool, we never could get supply up until May 2021. After that, we started seeing more land coming onto the market. Since then, I'd say it's been a perfect storm of good crop prices, better-than-expected yields and government payments. The low interest rates haven't hurt either."
Rothermich categorizes buyers as he reviews auction results. As for who's buying in today's hot market, he says it's about 50/50 farmer to investor. Cash is king right now, he adds.
"Realtors tell me they are seeing a lot of cash sales. There is cash in the countryside waiting to buy a farm. I don't see that changing as we look into 2022. Interest rate increases may temper price increases, but when you are looking at a cash market, that becomes less of a factor. And that's what we are seeing in Iowa."
FARMERS DRIVE THE MARKETS
President of Hertz Real Estate Services, Doug Hensley, is also seeing more inventory coming onto the market, drawn by strong land prices. He also believes there is a sense of urgency with some prospective sellers.
"Prices aren't motivating every sale, but they are certainly motivating some sales. The biggest question as we move toward the end of the year and into 2022 is whether the marketplace can absorb the larger volume of acres coming up without it negatively affecting price."
Asked if more institutional investors are in the current farmland market, Hensley says during the last decade, he's seen an awakening to the fact that ag land is an attractive asset class. Historically, land has outperformed the S&P 500 with far less volatility, providing steady long-term returns averaging 11% since 1991.
Hensley adds that most recently, there's been an emergence of what he calls "crowdfunding" for retail-level investors who want to buy farmland.
"I don't think these new groups are having a huge effect," he adds. "In heavy row-crop-focused areas, farmers are buying 70 to 75 of every 100 farms we are selling. They are absolutely driving the market. Farmers drive prices up, and they drive them down. The institutional investors are involved, but they are a minority and not as active in the market as farmers."
Hensley doesn't think, at the end of the day, laws over farmland ownership have made a measurable difference when it comes to the buyer pool in states like Iowa, Indiana and Illinois, where he mostly markets.
"It's true that without the ownership laws, you create a little deeper buyer pool; but those are not the buyers that create the depth of the market. They are not the buyers at the top; they are more value-oriented buyers. Remember that institutional buyers are data- and return-driven, so they are more disciplined and generally not market setters. Farmers, on the other hand, while they can be very disciplined as buyers, bring different elements to that decision. There is a level of emotional engagement for local farmers that institutional and even individual investors don't have. I don't think that changes, regardless of laws around ownership."
RULES ON LAND OWNERSHIP
Today, according to research and reports from the Family Farm Action Alliance, 22 states have rules regarding foreign and/or corporate ownership of farmland. It would be hard to prove these rules have negatively affected price.
Over the last year, five states stand out as surpassing average increases in land prices between 2020 and 2021, both on cropland and pasture ground. These five -- Iowa, Kansas, Minnesota, Missouri and Wisconsin -- exceeded gains of 7.8% on cropland and 5.7% on pasture ground. All five have state laws limiting foreign and/or corporate ownership of agricultural land, with penalties up to $5,000 and, in many cases, divestment requirements.
Joe Maxwell applauds states that have enacted laws to protect farmland but argues federal law is the key to protecting control of America's farmland.
Maxwell, co-founder and president of Family Farm Action Alliance, a Missouri-based group focused on power monopolies that control this country's food and agriculture sectors, says the issue of foreign ownership of agricultural land is common worldwide.
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In the U.S., the issue came to light in the 1970s, as investors from Spain and Japan began acquiring farmland. As a result, more than 20 states moved to ban foreign ownership of farmland.
"So, we've dealt with this in the past. And we've taken this stand that focused on beginning farmers and the unfair competition huge investors posed to their coming into the market," Maxwell points out. "Today, it's more than that, though. Today, I believe this is a food and national security issue. We've doubled foreign investment in the U.S., and that's just what we know. Disclosure laws are very weak, and often, there is no real enforcement. So, we honestly don't know how big of an issue this really is today."
AN ISSUE FOR URBAN YOUNG
While farmers and ranchers have raised concerns about these ownership trends in years past, they mostly failed to capture national attention the way New Yorker Sam Abodo did earlier this year with an op-ed column he wrote for Newsweek titled, "China Is Coming for American Farms."
"Farmland was never really on my mind," 20-year-old Abodo says. "But I found the issue of Chinese ownership quite interesting. When the Chinese invest in something, they are really smart about it. Like with Smithfield Foods, they buy up an American corporation with land holdings and a stake in food production."
Abodo, an intern at the American Foreign Policy Council when he did his research, pointed to COVID-driven food shortages, noting that China increased pork production in the U.S. and exported that to China.
"We were seeing food produced here that didn't even go to American consumers," Abodo explains. "That is tough to think about. At some point, we could go to the supermarket, and there is nothing there even though it's being produced (here), because it's all been exported to China. While it's true China doesn't own more than a tiny piece in terms of U.S. acreage, my issue is they have control over American companies and are investing in American companies that deal with our food supply. I'd like the U.S. government to not just be reactive over something so vital."
Maxwell agrees. He says the Family Farm Action Alliance advocates for transparency, because many corporations set up shells to disguise true ownership and control.
"It's sometimes a straw person, where they technically own 51% of this LLC holding the land, but there is a management agreement giving control of the land to a foreign or corporate investor. On the face, it may appear to be held by a U.S. company, but in reality, the person controlling what is produced who owns that production and who decides where it goes is in fact a foreign interest. We are concerned with that control."
The Family Farm Action Alliance's position is that foreign ownership of agricultural land is not just an issue of national security but also extracts wealth from rural communities. Maxwell says some owners bring in their own inputs, control output and bypass the area's infrastructure. In these cases, more than denying young farmers ownership opportunity, the arrangement can negatively impact growth and economic vitality for an entire rural community.
There is already framework in place to address these concerns. The Exon-Florio Amendment, passed in 2008, authorizes the president to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security. Today, it is the national security test for foreign investment. The review process essentially considers whether there is credible evidence that would lead the President to believe the foreign interest exercising control might take action that threatens to impair national security. It is a review delegated to the Committee on Foreign Investment in the United States (CFIUS). In 2018, President Trump signed the Foreign Investment Risk Review Modernization Act, granting the CFIUS new powers over types of foreign investments that include real estate. That same year, U.S. intelligence agencies reported China's targeted acquisitions constituted an "unprecedented threat" to the U.S. Some have referred to this as "weaponizing investment."
Abodo says in his research, he found specific strategies outlined by the Chinese Communist Party's 2013 food security initiative that encouraged its companies to gain more control over agricultural supply chain imports.
SEEKING A TRANSITION
The Family Farm Action Alliance's Maxwell stresses the group is not advocating an immediate ban on foreign and/or corporate ownership. It doesn't want to see a lot of land suddenly dumped on the market, causing values to collapse. Rather, it seeks a transition.
"We didn't get here overnight, and we need a transition plan to move these buyers out of the market that allows acres to come up for sale over time."
The Family Farm Action Alliance has three policy solutions. First, there has to be transparency as to what foreign entities are buying land and how much. Second, the Family Farm Action Alliance advocates a strong, well-defined ban moving forward on foreign corporate ownership of U.S. farmland. And last, the Family Farm Action Alliance wants to see corporate ownership of U.S. farmland (domestic or foreign) limited. It notes that "a just food system that works for everyone cannot be achieved if a few hands control the majority of farmland."
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