Real estate investors finding farmlands are cash crops

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The ongoing fright-show in the commercial and residential real estate markets has some investors returning to the soil.

Lucky for them, that might be the best place to start.

The booming farmland market in the Midwest has some murmuring about asset price bubbles in states like Iowa and Nebraska. That growth seems to have bled westward just enough to spark a healthy farmland real estate market in Colorado.

“In relation to the rest of the real estate disciplines, we’ve seen a considerable rise,” said Kiowa-based Co-Ka-Ne Consultants owner Jim Digby. “We haven’t seen the kind of growth that they’ve had out in the Midwest, but the strength out there has definitely helped our market.”

Russ Tomky, the president and CEO for Farm Credit of Southern Colorado in Colorado Springs, a quasi-governmental agency with a charter to provide agri-business loans, said farmland values are appreciating across the board.

“We’re seeing a lot of activity in good, quality farm ground, and so the market price for those properties continues to rise,” he said. “In the eastern Colorado counties like Lincoln, Kiowa and Powers, we’ve seen anywhere from a 5 to 30 percent increase in farmland prices in 2010.”

Kit Carson, Yuma and Cheyenne Counties have also benefited.

But farmland is not just a good investment for farmers. Many investors are absentee owners leasing the grounds to a local farmer on a cash or crop-share basis.

This year saw the highest average wheat yield per acre in Colorado history, and strong commodity prices have turned it into a blow-out year. Digby said investors expect to see a 5 or 6 percent annual return on the underlying crop.

“Commodity prices are a nice bonus right now, but that’s not the only reason why it’s a solid investment,” he said. “The land is a fixed commodity as well as an income property, which makes it a pretty safe investment. It’s a nice hedge against the financial turmoil we’ve seen in recent years, and in my opinion, people are afraid of inflation. They’re going into farmland for the same reason they’re going into gold.”

Financing has dragged the commercial and residential markets to a crisis point, but not so with farmland. According to Digby, Farm Credit’s biggest competitor is cash.

“A farmer can become cash-rich pretty quickly with a few good years, but the buyer demographics have changed,” he said. “You’ll see an oil man from Houston invest in farm property, or professionals who do something else to make a living but are looking for a safe place to go with their money.”

Tomky said that the financially conservative nature of farmers might also contribute to the relative strength of farmland borrowers.

“A lot of our clients lived through the 1980s, which was a very difficult time for the farm economy,” he said. “Those farmers through the years have become very conservative. They’ve deleveraged their balance sheets, they’re very liquid, and a lot of them live and operate on cash. You have a good year in production and price like 2010, and you’ll find yourself with a lot of cash on hand. Instead of sitting on that cash, the best option is sometimes to grow your operation.”

The real estate market for farmland is far removed from traditional industry memes of power-brokers and glass-walled offices facing the mountains. Digby wears a cowboy hat and has a bushy mustache, and this kind of down-home style might be a good lesson for the corners of the market still struggling to recover from years of excess.

Farm Credit doesn’t sell its loans in a secondary market. Instead, it services the loans even after the initial agreement, which means that it continues a face-to-face relationship with the borrower.

“We were steady through the 2000s when some lenders were relaxing underwriting standards and doing some other pretty ridiculous things,” Tomky said. “We never did. We held our ground even though we were getting beat up in the market. But we have a saying: we don’t compete with stupid.”

Jonathan Easley can be reached at jonathan.easley@csbj.com or 719-329-5235. Find him on Facebook or Twitter.