If UK investors are depressed about the state of the UK land prices, the market is just as sticky on the other side of the Atlantic.
In America, a simultaneous depression in the energy and agriculture industries has initiated a drop in farmland prices of up to 60% in the last couple of years. But the value of prime land appears to be stabilising at about $1,000, per acre (£670 per acre), which is considered to reflect the potential of land more closely than five years ago.
The outlook in some parts of the USA is far from bullish, and the media has focused on the plight of farmers who have lost, or are about to lose, their land through bank foreclosure.
Shrinking margins, increasing debts, tumbling land values and over-production are strangling the industry and the land market.
According to the state university, almost half of Colorado farmers lost money in 1985, with most of the others earning less than $20,000 (£13,500) and 12% convinced that they would be out of business by the end of the year.
Hundreds of US farmers are responding with litigation, and there is no shortage of cases pending in which the banks are being sued for over-lending.
Many banks are on shaky ground themselves. Most of the 14,500 banks in the US are small, community affairs, highly vulnerable to the depressed real estate, energy and agriculture industries on which they rely.
“Rural banks are finding themselves heavily undercapitalised,” says Rod Urich of the First Interstate Bank of Denver, Colorado.
A few years ago, about 10 of them might have been expected to collapse each year. In 1986, the figure is already over 100.
But the news is not entirely bad, according to the US Real Estate Investment Journal. Two-thirds of farmers have survived the crisis quite well, mainly because they avoided getting into debt.
Market watchers now feel the market is reaching its proper level, and that this could be the time to buy. “With farmland prices near their bottom, it might be an ideal time for investors to position themselves for the next swing,” said Milo A Konopik. He is president of the Farmers National Co of Omaha, the nation’s largest farm management firm. It manages nearly 4,000 farms in 10 midwestern states, and Mr Konopik claims that most are debt-free and generating a positive cash flow for absentee owners.
“Our objective for clients is an annual 6% or better return on investment,” he said. When farmland prices were at their peak six years ago, returns on investment were nearer 2% or 3%. Since then, values have plummetted, but farm income on healthy units is down only 15% or 20%.
Although investors are now starting to show an interest, the response to farmland prices is slow and indications are that prices could go even lower. They are considered unlikely to return to 1980 levels in the foreseeable future.
Impending tax reform, due to take effect from January 1 1987, is expected to shift investment incentives away from tax shelter. As the emphasis switches to rents and future appreciation, it spells bad news for the agricultural investor and the thousands of acres currently on the market.
