2019 Illinois Farmland Values

& Lease TrendsDavid Klein

AFM, ALCGeneral Chairman, ISPFMRA Land Values & Lease Trends

Vice President, Managing Broker & Auctioneer

The 7 IssuesAffecting Farmland Values

& Lease Trends TodayJuly 31, 2019

In ALL of Agriculture- real estate assets are ~81.5%

2019 Illinois Farmland Values

& Lease TrendsUnderstanding Our Farmland CategoriesUsing the Productivity Index from the University ofIllinois (Bulletin 811).

Excellent Productivity – 147 to 133

Good Productivity – 132 to 117

Average Productivity – 116 to 100

Fair Productivity – Less than 100

Recreational Tracts

Transitional Tracts

The Magic Box

The Golden Triangle

P.P.

P.P.

ISPFMRA: Most Likely Factors to Cause Farmland Price Increase Greater than 5%

Percent of

Respondents1

Increasing commodity prices because of poor 2019 growing conditions in the United States 55%

Decreases in interest rates 50%High yields leading to higher incomes 41%A 2019 drought causing low yields 40%Poor crop yields in South America 40%Good economic growth in the United States 33%Increases in commodity demand because of improving Chinese growth 31%

Changes in exchange rates 22%Decreases in stock prices 17%Increased variability in stock prices 17%General economic recession in the United States 9%

1 This is the percent of respondents that indicated that this factor, if it occurred, would cause a more than 5% farmland price increases. For example, 55% of respondent indicates that "increase in commodity prices because of poor 2019 growing conditions" would cause farmland price increase.

Percent of Respondents1

Increases in interest rates 74%Falling commodity prices because of good 2019 growing conditions in the 66%Elimination of ethanol mandates 64%Reduction in commodity demand because of slowing Chinese growth 57%Good crop yields in South America 36%General economic recession in the United States 24%Changes in exchange rates 24%Increases in stock prices 14%Decreases in stock prices 10%A 2019 drought causing low yields 7%Increases in the variability of stock prices 7%Good economic growth in the United States 3%Recession in Europe 3%Decreases in stock prices 3%

Table 1. Factors that Could Cause Farmland Prices to Decrease More than 5% if they Happen in 2019.

1 This is the percent of respondents that indicated that this factor, if it occurred, would cause a more than 5% farmland price decline. For example, 75% of respondent indicates that "rising interest rates" would cause farmland price decreases of more than 5%.

U.S.

#7 – Next generation enterprise systems:

• All have “A Story”• Outside Capital Infusion to participate in

• Organic – not just non-gmo. • Industrial Hemp – new craze.Absentee landowners to farm managers: “Just do something different!”

• Wind Energy – & dividend reinvestment• Solar Energy – & dividend reinvestment

These all provide “demand sources” for farmland.

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Speaking of Demand:

It’s stillfarmers

(Percentage of transactions)

#6 Alternative Investments

Investment Comparison – 11 Year Data2018: It didn’t “feel like a win – but I’ll take it”!

Investment Return Rankings By Asset Type

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

HIGHEST ANNUAL RETURN

Illinois Farmland

Long Term Gov't Bonds Illinois Farmland Small Cap

StocksLong Term

Gov't BondsLarge Cap

StocksSmall Cap

StocksInternat'l Stocks

Illinois Farmland

Long Term Gov't Bonds

Illinois Farmland

Long Term Gov't Bonds

Internat'l Stocks

Small Cap Stocks

U.S. Treasury

Bills

U.S. Treasury

Bills

U.S. Treasury

Bills

Large Cap Stocks

Small Cap Stocks

Long Term Gov't Bonds

Small Cap Stocks

Small Cap Stocks

Large Cap Stocks

Internat'l Stocks

Small Cap Stocks

Illinois Farmland

U.S. Treasury

Bills

Small Cap Stocks

Internat'l Stocks

Small Cap Stocks

Internat'l Stocks

U.S. Treasury

Bills

Small Cap Stocks

Long Term Gov't Bonds

U.S. Treasury

Bills

Illinois Farmland

Internat'l Stocks

U.S. Treasury

Bills

Illinois Farmland

Small Cap Stocks

LOWEST ANNUAL RETURN

Large Cap Stocks

U.S. Treasury

Bills

Internat'l Stocks

U.S. Treasury

Bills

U.S. Treasury

Bills

Long Term Gov't Bonds

Internat'l Stocks

U.S. Treasury

Bills

Internat'l Stocks

Internat'l Stocks

Large Cap Stocks

Long Term Gov't Bonds

Long Term Gov't Bonds

Illinois Farmland

Large Cap Stocks

Large Cap Stocks

Asset class quilt comprised by Don McCabe, AFM

The Stock Market’s Resurgence in 2019!

Several governments except in the US –“Can I borrow your money? and I’ll give you less back!

Return on Investment – Our traditional 3.5 percent to 4.0 percentcompetitive return on farmland investments is diminished by the lowercommodity prices. Those returns are now in the 2.4-3.0 percent range.Investors find this acceptable in an unpredictable general economy. Butinterest rates on treasuries present an alternative.

▼

Illinois Farmland- -

Prime Class A Farmland cost- 2019 $10,500

2019 Rent @ 99.0% tillable $325

Real Estate Taxes & Liability Insurance -$ 57

Repairs, Soil Fertility Tests -$ 4

Net Income/Acre $264

Cash Return on Investment 2.51%

Put the money in the Bank?

Your Farm’s cash return: 2.XX%First Mid Farm Management Mgt. 2.25%Vanguard Prime Portfolio MMkt: 2.27%Your Bank’s FDIC Insured

Money Market: 1-1.5%

We’ll get back to interest rates later.

We continue to chart the value of each category of landover time in a Region and look at continual compoundedannual growth rates using the data provided for severalyears.

Regional Data GroupBruce Sherrick, Ph.D.

University of IllinoisCollege of ACES

1301 W. Gregory DriveUrbana, IL 61801(217) 244-2637

Thanks to Dr. Sherrick!!!

Statewide Land Values Summary Chart: 2001-2018

The Long View on Land Values

This is the chart of “What my parents would have made if they would have just bought a farm instead of having me.

#5 – State Government Policy

• History of “open investment”• Taxes• Exodus

Regional Restrictions

States with corporate ownership restrictions

Real Estate Taxes – A Growing Expense!

• Most Real Estate Taxes have double over the past 10 years– Assuming a goal of 3% cap rate of net income – the

increase in real estate taxes would reduce the value of the farm approximately $900 per acre!

$- $5.00

$10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00

2006 2008 2010 2012 2014 2016 2018

Real

Est

ate

Tax

Per A

cre

Year

Macon County Class A Farm

#4 – Farmland Market Supply

Settling Estates #1

Change in Volume, Farmland SoldLast Half 2018 compared to 2017

2018 Method of Selling Farmland

Method of Selling Farmland, 2018Sealed bid 4%Multi-parcel auction 11%Public auction 39% (up 4)

Private treaty 46% (down 3)

Higher auction volume = Just to get it moved.This was noted in Iowa recently as well…..but their prices are now maybe……..increasing.Private treaty increasing in IL in 2019 to keep price close.

Look for more divergence

Current 3 month Treasury Yield or Vanguard MMkt is 2.27%Crop share lease returns $205/ac. on $10,000/ac. land. 2.05%

RISINGINTERESTRATES….Until NOW

#3.

Mortgage Rates have already been dropping back

#3(B): Strong US Dollar vs. Other Currencies

#2 – Farm Income• Acres x Production• Inputs & Grain Prices• Federal Govt’ Influences

• Ethanol• Trade/Tarriff• Farm Program Pmts.

2019 U.S. Planted Acreage Forecast

* Estimated **Forecast

Source: USDA NASS Historical & Ag Outlook Forum, Feb. 22, 2019

92 M

23 M

+/-1 M ?85 M+/-2 M ?

47 M+/-1 M ?

6/2891.7 6/28

80.0

2019 MFP- It’s a start, as long as you planted something.

MFP’s helped the most productive land improve profitability in 2018!

2018 Incomes Minus 2017 Incomes.

Land Quality Lease type Excellent Good Average Fair

------------------ $ per acre ----Traditional crop share +12 +6 -5 -14

Cash rent +1 -19 -25 -25

Custom farming +12 +7 -7 -24

The way it’s being administered in 2019 is different!

• Suddenly we may receive $25-$30/ac. more aid than we thought, but we may not make 185 bushels/acre corn.

Courtesy Dr. Gary Schnitkey, Univ. of IL

▼ Net Farm Income –Farmland is what it earns!Crop insurance is an important safety net. In thereport - John Leezer, Region 3 Chair, highlightedour past 3 years harvest prices. While Spring ‘19corn is the same, our spring soybean price wasless than the past. This made the earnings outlookfor 2019 lower than ‘17-’18, especially whenplanting commodity soybeans in 2019.

2019 Income Summary

• Significant portion of the large 2018 grain inventory was able to be priced at higher values the last three months, and farmers have done that.

• Corn is back in the “Driver’s seat” Beans are in the “back seat”. Crop Insurance drove that decision.

• This also drives rent levels looking forward.• Past high demand uses are waning.• There is a lot of uncertainty for Illinois farmers which causes them

to in many areas, pause on farmland purchases. This is making farmland price levels a little softer so far in 2019.

▼ Use of Agriculture’s Profits –• We are burning through the cash generated

from the multiple years of agriculturaleconomic prosperity for some farmers.

• That cash gets redirected into debt service,aggressive cash rents and land purchases. Inthat order. New land purchases are last.

• Some farmers need to reduce long-term debt.Sale-leasebacks continue to occur. Certainlocal regions have been more profitable or aremore owner/operated land and this leads tostronger farmland values in those areas!

#1 – “End of Cycle” Economics

• Is Inflation “Dead”?• What about the “yield curve”?• What is “full employment”, anyway?• Who is “fully employed”?• So, demographically - What drives change?• Where does farmland fit in that cycle?

Farmland has a strong correlation with inflation

The Yield Curve inverted on March 21, 2019, the first time since 2007. Why is this significant?

The last 9 recessions in the US were all preceded by an inverted yield curve (1-yr yield > 10-yr yield). If history repeats, we could see a recession begin w/in the next 5-21 months (avg lead time = 14 months).

The Demographics of who is earning Money

Generation Name

Births Starting

Births Ending

Youngest Age

Oldest Age

Baby Boomer Generation 1945 1964 54 73

Generation X 1961 1981 37 57

Generation Y -The Millennials -

Gen Next1975 1995 23 43

Generation Z 1995 2015 1 23

Who is going to be spending $ is changing

20 years low

10 Yr. Economic Expansion period w/out Recession

Land and Lease SurveyDr. Gary Schnitkey

• Surveys of individuals knowledgeable about the farmland and farmland rental markets. ISPFMRA & RLI Membership.

• Land Survey • Prices and returns stable in 2018. Sentiment toward

lower prices in lower land classes. Expect similar projection for First Half 2019.

• Lease Survey• Cash rents projected very slight decreases again for

2019 in lower quality soils, stable on better land.

What Will Happen to Farmland Prices in 2019?

0%

9%

52%

29%

10%

0%

0% 10% 20% 30% 40% 50% 60%

Decrease more than10%

Decrease between 5 and10%

Decrease 1 to 5%

Stay the same

Increase 1 to 5%

Increase more than 5%

PERCENT

Expectations of Price Changes in 2019.

Observations: #1 – largest avg. tract size. (typical is 102 so 22% above)#2 – percent tillable is 2% lower than avg.#3 – soil pi – was 1 point lower than avg.#4 – Sale Price/PI/Tillable acre: 92% of the avg. since 2012.We’ve continued to pull back in the first half 2019. About 2-3%.

First Half 2019 Illinois Arms Length Transaction Results Averages

Illinois FarmlandPrice Index Soil PI Sale Price $/PI/Til.

First Half 2019 2019-1 124.2 83.0 88.9% 128.0 $8,532 $9,507 $66.13 $73.00Last Half 2018 2018-2 Averages: 95.4 82.1 91% 130.4 $8,769 $9,969 $66.82 $76.36First Half 2018 2018-1 Averages: 116.6 110.3 92.50% 130.1 $8,700 $9,657 $68.00 $74.08Last Half 2017 2017-2 Averages: 89.3 79.1 90.30% 128.8 $9,132 $10,286 $70.84 $80.91First Half 2017 2017-1 Averages: 98.6 87.2 90% 129.4 $8,908 $10,018 $68.09 $77.31Last Half 2016 2016-2 Averages: 122.8 112.3 87% 128.7 $8,793 $10,559 $67.25 $83.43First Half 2016 2016-1 Averages: 106.9 85.0 91% 129.5 $9,228 $10,664 $70.55 $82.15Last Half 2015 2015-2 Averages: 95.4 82.3 87% 127.8 $9,032 $10,135 $68.16 $79.23First Half 2015 2015-1 Averages: 104.1 92.1 90% 129.6 $9,861 $10,627 $74.67 $79.74Last Half 2014 2014-2 Averages: 95.6 87.0 91% 127.7 $9,667 $10,469 $74.28 $80.73First Half 2014 2014-1 Averages: 89.3 83.7 93% 130.6 $10,837 $11,350 $83.26 $85.25Last Half 2013 2013-2 Averages: 92.8 83.2 85% 128.7 $10,160 $11,501 $78.70 $87.13First Half 2013 2013-1 Averages: 110.8 100.4 90% 126.3 $11,014 $12,002 $84.44 $92.24Last Half 2012 2012-2 Averages: 100.8 94.3 94% 131.1 $10,579 $11,140 $79.65 $84.05First Half 2012 2012-1 Averages: 114.5 103.9 91% 128.9 $9,287 $9,865 $70.97 $75.36

Sale Price/PI

Sale Price/Till

Tillable Acres % Tillable

Acres Tract Size

First Half 2019 Averages by Soil Productivity Class

SOIL PI Class Price/ Acre Avg. $/PI/Tillable Acre

Excellent 138+ $10,308 $78.68

Good 130-137.9 $9,207 $69.98

Average 123-129.9 $8,106 $68.88

Fair less than 123 $6,496 $72.39

138 PI & Higher Averages: 128.0 90.0 96% 140.8 $10,308 $11,100 $73.20 $78.68

130-137.9 PI Averages: 111.5 77.7 93% 134.0 $9,207 $9,388 $68.66 $69.98123-129.9 PI Averages: 144.7 78.0 94% 126.3 $8,106 $8,693 $64.13 $68.88Less than 122.9 Averages: 116.8 83.1 77% 111.6 $6,496 $8,689 $58.21 $72.39

Soil PI Sale Price $/PI/Til.124.2 83.0 88.9% 128.0 $8,532 $9,507 $66.13 $73.00

Sale Price/PI

Sale Price/Till

Tillable Acres % Tillable

Acres Tract Size

General Observation: We do not have the production income for Illinois farmers to feel confident in land purchases right now. Will they after harvest? Will we see differences in different areas of the state for bothland values and lease trends because of this? Probably.

Late June/July 2019 Iowa SalesRecent Iowa Farmland Auction Results

Date Acres County Twp/Town CSR 2 Price/AcJuly 26 80.94 Lyon Dale 98.1 $13,600July 25 76 Hamilton Webster City 85.9 $10,000July 19 72.64 Washington Wellman 84 $9,937July 19 18.37 Washington Wellman 88 $15,242July 19 68 Washington Wellman 84 $13,603July 19 106 Buchannan Winthrop 87.2 $8,900July 23 80 Floyd Ulster Twp 89.6 $11,600July 23 109 Floyd Ulster Twp 87 $9,000July 23 80 Floyd Ulster Twp 89.3 $8,475July 15 40 Boone Ogden 80.3 $7,700July 15 237 Cerro Gordo Dougherty 68.4 $7,200July 2 75 Humboldt 69.3 $5,700July 2 76.7 Humboldt 80.5 $7,450June 28 56.34 Cerro Gordo Dougherty 74.3 $9,300June 28 107 Franklin Latimer 86.2 $8,400June 28 70 Franklin Latimer 86.5 $7,400June 28 80 Franklin Latimer 76.5 $6,700June 27 79.3 Clay Logan 82.7 $8,500June 27 70 Cedar Wilton 95.7 $11,000June 26 79 Greene Paton 82.3 $8,750June 26 68.29 Webster Gowrie 84.2 $8,775June 25 89 Kossuth Whittemore 66.5 $6,250Averages: 82.7 83.0 $9,249

Iowa Brokers say it has been a slow, flat first half of 2019, but the past month starts to indicate where they have a great crop coming along, there is strength. Generally ~$100-110/CSR first half of year. Average June/July = ~$111/CSR

Income Confidence!

Long Term Chart on RentsWe continue to chart the rental rates over time in a Regionand use this data to look at continual compounded annualgrowth rates using the data provided for several years.

Regional Data GroupBruce Sherrick, Ph.D.

University of IllinoisSurvey Group

Gary Schnitkey, Ph.D.University of Illinois

Thanks, Gentlemen & all who help you at the U of I!!!

Statewide Rental Rate Summary Chart: 2001-2018

Soybeans were“rent drivers” in 2018.What about next Fall when negotiating farm leases?

As of 7/26We are at$8.56/bu.Central IL

What Could Push Land Values Lower?

• Lower Farm Incomes across ALL Land Classes– Trade and Tariff issues (soybean issue)– Ethanol reductions & use (corn issue) – Equals Lower Cash Rents

• Higher Interest Rates (not likely right now)• High volume of sales – especially in a

concentrated area• Continued Tax Increases (in Illinois) eat away at

profits and reducing buyer interest.

What Could Drive Land Values Higher?

• Higher Farm Incomes across ALL Land Classes– Trade and Tariff issues get resolved– USMCA is passed helping solidify demand– MFP’s still get paid in high pmt. rate counties

• Lower Interest Rates– Better than alternative investment choices– Cheaper borrowing costs = more $ for land– Lower USD (possibly) = better sales exchange rate

• Continued tight available supply

*Opinions expressed are those of David Klein and not First Mid Ag

Services or the ISPFMRA.

Contributing Organizations

Illinois Society of Professional Farm Managers and Rural Appraisers

University of Illinois College of ACES

Illinois Farm & Land Chapter of the REALTORS Land Institute

@CharlieBilello BloombergBusinessweek

USDA & Federal Reserve Banks

Pew Research Center Bureau of Economic AnalysisHaver Analytics

Thank You and Questions