Down on the Farm?

Strong and rising prices. Lots of buyers chasing a thin supply of properties. Sounds a lot like the current condition of the Seattle residential real estate market.

Which it is. But its also an accurate description of the market for agricultural property east of the mountains.

A graph in the most recent land values report from Northwest Farm Credit Services, the Spokane-based agricultural lender, tells the tale starkly. The average dollar-per-acre figure for transactions involving sales of 40 acres or more in Washington, Oregon, Idaho and Montana slumped to just above $2,500 in 2010. In 2013, it had rebounded to more than $3,500 an acre, which is higher than even pre-recession levels. But the total number of transactions is headed in the opposite direction, falling to 1,000 in 2013, half the level of 2006.

The story holds up when the focus is concentrated on Washington specifically, Northwest Farm Credit Services says: While sales have slowed, prices for most land classes remain strong. Demand is good from local farmers seeking to expand their operations; however, properties sold and at auction have shown strong interest from institutional investors and large corporate farms.

The trends in the Pacific Northwest are somewhat contrary to those in other parts of the country. The Federal Reserve Bank of St. Louis reported in July that ag land prices in the Midwest and Midsouth were down 3.5 percent in the second quarter from a year ago, with higher declines for certain categories of properties (ranch and rangeland acreage prices fell 7.5 percent from a peak in the fourth quarter of 2013).

The regional disparities arent surprising, says Flo Sayre, a Pasco-based real estate broker with Farmers National Co. Were much more of a climate unto ourselves, she explains.
Multiple reasons account for the differences, Sayre adds. Those include diversity of crops (more than 85 in the Columbia Basin vs. a heavy reliance on corn, wheat and soybeans in the heartland) and prices for those individual commodities. While corn prices have slumped nationally, sweet corn and corn for grain individually dont rank in the top 10 of Washingtons agricultural commodities by value of production. Pacific Northwest farmland prices are driven by factors such as proximity to transportation networks (access to ports and Pacific Rim markets help), crop rotation patterns (alternating hay with onions or potatoes) and rainfall and irrigation.

Sayre says anecdotal evidence backs up what the farm credit services data say about sales activity. Certainly there are interested buyers, from individuals looking to add to their properties to institutional investors, such as real estate investment trusts that concentrate on specific types of ag real estate. I have buyers calling on me or emailing at least once a week, everything from individuals looking for a 20-acre block to investors looking for a $20 million property, she says.
One such institutional investor is HarvestWest Investments, one of whose cofounders is Greg Richards, former CEO of Seattle-based Rung Industries, a maker of equipment used in sand and gravel pits and quarries, which he sold in 2010. HarvestWest has already assembled a portfolio of more than 10,000 acres of land through its fund. We have built a unique vehicle for investors to own a diverse group of properties in this generally stable and long-term appreciating asset, while relieving them of the burden of property management, the company says on its website. HarvestWest partners with the best farmers in the region to lease and operate our land.
Why the Northwest? The natural landscape in the area with its transportation infrastructure, access to ports for exporting, consistent water supply and variety and volume of crops is a vital part of the United States farmland market, HarvestWest points out.

Those willing buyers are motivated by increasing comfort with economic trends and most commodity prices, as well as interest rates at low levels not seen in decades.

Finding willing sellers has been tougher. While some feel a need to sell because of age and health, others dont see a need to, Sayre says. The place is paid for. If they were to sell it, theres a huge capital gains tax bite. They might have bought the land for $500 an acre; now its worth $10,000.

If they choose not to do the actual farming themselves, they can still lease it out at very attractive rates and have plenty to support what for many is a relatively modest lifestyle or whatever charitable activities interest them.

What are they going to do with their money, put it in a bank? she says. Most of them came out of the Depression or post-war era. Theyre on a very security-based mindset. That dirts there. Its not going anyplace.

Still, some property owners are showing more interest in testing the market. Sayre had three listings come in in three weeks. We are starting to see some movement in ag property now, she acknowledges.

Northwest Farm Credit Services believes factors are in place for sustained interest from buyers, and thus at least stable, if not growing, prices. Livestock operations want more land for forage and grain production, which has increased values even for lower-quality properties. Dairy farmers are looking for more open land in the Yakima Valley to control feed costs and enhance waste management programs, the Spokane ag lender says.

Land values for good pivot irrigated land are at record highs; even lower quality irrigated properties with poorer soils have seen increasing values, it adds. And Sayre notes theres a growing interest in regionally and organically produced foods, which will also aid land values.

Another subsector getting considerable interest from prospective buyers is vineyard property. Double Canyon Vineyards, a subsidiary of The Crimson Wine Group of Napa, California, earlier this year sold 307 acres of unplanted vineyard land in the Horse Heaven Hills to Winemakers LLC, according to Seattle-based investment banking firm Exvere Inc.

Michael Bennett, a managing director with Exvere, which represented Crimson Wine Group, says the sale attracted multiple bidders with interest in the property for wine-grape growing, for tree fruit or for produce. Attached water rights added to its attractiveness. But vineyard properties up for sale havent been plentiful. Its not that theres not buyers out there right now, he says.

By its very nature, agriculture is susceptible to cycles in crop prices and yield, rainfall, temperatures and land prices. Property values have fallen before as interest in and demand for farmland wanes.

Sayre believes prices are going to hang on for a while, though. Current prices dont seem to be scaring away potential buyers. Everything, she suggests, is in demand at the right price.