Farmland Values Soar Despite Pandemic

LOW INTEREST RATES AND THE STRONG FARM ECONOMY SUPPORTED THE RISE IN LAND VALUE, SAID THE KANSAS CITY BANK.

By Chuck Abbott8/13/2021

Fueled by strong commodity prices and continued pandemic assistance, farmland values are skyrocketing, up by 14% in the central Midwest and by 10% in the central Plains, said the Federal Reserve banks in Chicago and Kansas City on Thursday. “Government payments have buoyed the agricultural sector,” said an Illinois farm banker surveyed by the Chicago Fed.

“Farmland values for the Seventh District climbed 14% on a year-over-year basis in the second quarter of 2021 — their largest such gain in eight years,” said the Chicago Fed in its quarterly Ag Letter. “Values are expected to rise again during the third quarter of the year.”

The Kansas City Fed said farm income had grown at a fast pace from a year ago, thanks to “a sharp turnaround in agricultural economic conditions and lasting support from government programs related to pandemic relief.” Although farmers and ranchers face higher production costs, the opportunity for profit is strong. “Despite potential headwinds, bankers indicated they expected improvements in farm income and credit conditions to continue in the months ahead.”

Low interest rates and the strong farm economy supported the rise in land value, said the Kansas City bank. “The value of all types of land throughout the district was about 10% higher than a year ago, the largest increase since 2013.”

Ag lenders in Colorado and Wyoming said drought has challenged producers this summer. A banker in Oklahoma said, “The increase in land values is making it difficult for both crop and livestock producers to afford purchasing based on the amount of return they generate from production.”

While most bankers in the Chicago Fed district were optimistic about the farm sector in the near term, some were less sanguine about the longer term, given uncertainties about the pandemic, export markets, input costs, and federal support. “High commodity prices, solid yields, and PPP loans have sharply improved farmers’ finances. However, long-term risks are of serious concern,” commented one lender.

Yes you can buy farmland with your IRA

Many farmers are surprised to learn you can buy farmland with an Individual Retirement Account.

Mike Downey | Apr 15, 2021

Source: Farm Futures – See the full article on their website. https://www.farmprogress.com/commentary/yes-you-can-buy-farmland-your-ira

Most people I work with own farmland, and many of them also own some type of retirement IRA. In transition planning, there is also a financial component to review what the income sources are during retirement.

There is no doubt retirement funds invested in the stock market have performed very well over the last decade. However, as retirement nears the mindset about the stock market often changes and causes some to question whether there are other investment alternatives available for their funds. 

‘I wish I could buy a farm with my IRA’

This is a common expression I hear. Farmers and landowners are comfortable with farmland and how it works. Farmland is also a long-term, stable investment which has historically appreciated in value.

Many don’t realize you can actually buy a farm with your IRA.

The IRS has allowed for the investment in farmland by your IRA since they were first introduced in 1974. So, why isn’t this better understood? One of the reasons is most of the typical IRA providers do not offer the option to invest in alternative investments such as farmland, only traditional investments such as stocks, bonds, and mutual funds. In fact, you must be a qualified custodian, administrator, or facilitator to offer these alternative investment classes which are now becoming more popular. This is an opportunity to self-direct and diversify all or a portion of your retirement funds away from Wall Street and into more private investment sources.   

Self-directed IRA

The first step is to open an account and roll all or a portion of your existing IRA to a self-directed IRA. Then, you advise your custodian or administrator which tract of farmland you wish to purchase. There are definitely some do’s and don’ts however:

Prohibited transactions. First, you cannot gain personal benefit or operate the farmland yourself. In other words, no self-dealing and the transactions must be arms-length in nature. You can buy, sell, and lease the farmland to anyone except for disqualified persons; they include you and your spouse, and any direct lineal descendants up and down your family tree (parents, children, grandchildren). However, buying, selling, or leasing to a sibling, cousin, extended family member, or neighbor, is acceptable. All revenues and expenses must flow to and from your self-directed IRA account and you cannot touch the monies personally. The investment must benefit your IRA, not you personally.   

Tax advantages. Just like other IRAs, a self-directed IRA shelters income tax as the income from the investment grows tax-deferred (Traditional IRA) or tax free (Roth IRA). The sale of a farm is also not subject to capital gains tax treatment. So, you can buy, sell, or trade farmland inside your self-directed IRA under no time restraints or concern over capital gains.

A self-directed Roth IRA (tax free growth), in addition to being exempt from capital gain tax on the sale of the investment, is a powerful combination from a tax standpoint.

Example: I buy 80 acres with my self-directed Roth IRA. The transaction is arms-length and all monies flow to and from my IRA account. Since I already paid the income tax when I contributed the funds to the Roth account, all income, appreciation, and capital gains grow tax free inside the account. With a Traditional IRA, I would be required to take minimum distributions (RMD’s) and pay the respective income tax beginning at the age of 72. However, RMD’s are not required with a Roth IRA; but if I elect to take distributions, they are tax free.

Is it too good to be true

Yes, it is legal to own farmland and other alternative investments with your IRA. There are also tax and legal advisors who may scrutinize it, just as your current financial advisor no doubt will. As with any investment, be sure to work with qualified individuals who specialize in this area and are familiar with the laws in your individual state. Otherwise, please know there are other investment alternatives available for your IRA if the future unknown of the stock market concerns you. 

Rural Bankers: Farmland Prices Hit Highest Level Since 2012

Source: AgWeb Farm Journal

By SARA SCHAFER April 15, 2021

Optimism is spouting in many areas of the rural economy. While the Rural Mainstreet Index (RMI) dipped from March’s record high of 71.9, economic growth is still occurring in rural America.

For April 2021, the index sits at 69, marking the sixth straight month the RMI has remained above growth neutral. The index ranges between 0 and 100, with 50 representing growth neutral. 

Around 40% of bank CEOs reported their local economy expanded between March and April.

“Strong growth in grain prices, the Federal Reserve’s record-low interest rates and growing exports have underpinned the Rural Mainstreet Economy,” reports Ernie Goss, who chairs Creighton’s Heider College of Business and leads the RMI. “Even so, current rural economic activity remains below pre-pandemic levels.”

The highlight of the report is the farmland price index. For a seventh straight month, it has advanced above growth neutral. The April reading climbed to 78.6 — the highest level since 2012, and up from 71.9 in March. This is first time since 2013 that farmland price index has posted seven straight months of above-neutral growth.

The farmland price index rose in each state included in the RMI. Nebraska claims the highest farmland price index with 82.6. That’s up from last month’s 76.1.

Farmland Index

Bankers reported 9% of farmland sales over past six months have gone to non-farmer investors.   

Farmland Investments - RMO

The April farm equipment sales index rose to 67.5, its highest level since 2013. That’s up from March’s strong 63.5. After 86 straight months of readings below growth neutral, farm equipment sales bounced into growth territory for the last five months.    

The confidence index, which reflects bank CEO expectations for the economy six months out, fell to a very healthy 72.4 from 76.7 in March. 

“Federal stimulus checks, improving gain prices and advancing exports have supported confidence offsetting negatives from pandemic ravaged retail and leisure and hospitality companies in the rural economy,” Goss says.

This RMI, which started in 2005, represents an early snapshot of the economy of rural agricultural and energy-dependent portions of the nation. It focuses on 200 rural communities in a 10-state region with an average population of 1,300. 

To read the full article on their website go to: https://www.agweb.com/news/business/farmland/rural-bankers-farmland-prices-hit-highest-level-2012