Bill Roberts: Land values

Agricultural Land: Value to Cost Relationship

By: Bill Roberts

Part of my journey through life allowed me the privilege to work as a credit

analyst and appraiser for the Farm Credit System. During those years of

service I learned a great deal about the history of their lending practices. For

many years, Farm Credit was the largest agricultural lender in the United

States. At the time I worked for them, they made long term real estate loans

on farm and ranch land based on 5 basic areas of analysis:

Character – of the borrowing entity or individual

Capital – the equity position and term distribution of debt exposed by the

balance sheet of the borrower as viewed before and after the proposed


Cash Flow – both the overall ability of the borrower to cash flow and the

ability of the proposed purchase to cash flow

Collateral – the security position of the bank with the property and any

necessary additional collateral used to secure the loan

Conditions – conditions set forth by the bank to assure repayment through

collateral should the loan fail to perform as planned

From the early beginnings of the Farm Credit System until several years

before I worked for them, the amount of money the system would lend on a

proposed piece of property was adamantly tied to its ability to cash flow on its

highest and best use. For example, if I wanted to buy pastureland that took

eight acres to run a cow and calf through the summer, the value could only be

based on pasture use of the land. If the feed value for the eight acres was

valued at monthly cash rent per unit times a five month grazing period, the

bank would only lend enough for the land’s cash flow ability to pay off the

loan using that annual projected income.

In the early 80’s when I worked for the system, it cost $15 a pair per month to

rent pasture in Colorado. At that time in our area it took at least 8 acres to

keep a cow/calf unit through the summer. Therefore, the income potential

was $15 times 5 months divided by 8 acres (15 X 5 = 75 divided by 8 = $ 9.38

annual revenue potential per acre). On a 15 year loan at 8% interest, that

repayment capacity of $ 9.38 set the price of the land at $ 80 / acre. The Farm

Credit System at the time I was with them would generally only make 80%

loans to appraised value. Therefore, if the appraised value based on the land’s


ability to pay for itself was $ 80, the lendable amount on that land was $ 64 an

acre ($80 times 80% = $ 64). You can plug today’s pasture rent figures in to

this equation and see for yourself what pastureland would be valued by banks

for lending today if this “ability to cash flow approach” was still used.

I hope you are not bogged you down in mathematics from the past. However,

I wanted to illustrate that land valued for what it “could earn” kept lenders

and borrowers in a safe place as long as commodity prices did not fluctuate

too much. Obviously, if cattle prices fluctuated drastically it could lead to

potential problems even in the aforementioned scenario. However, by tying

the land value at close to cash flow potential, it minimized the scale of and the

frequency of potential cash flow problems on land purchased with borrowed


Several years before I joined the Farm Credit System (I do not know exactly

when), the “ability to borrow based on the land’s ability to cash flow” was

abandoned. It was abandoned because private banks came in competition for

agricultural loans with Farm Credit and loaned money based on “speculative

values.” For instance, if pastureland was currently valued at $80 an acre as

supported by relatively current comparative sales, but the cattle market was

rising, the banks might loan two to three times that land value amount. They

protected the banks interest by taking land the borrower owned free and clear

as additional collateral. Once adequately collateralized, they would look at

the “overall cash flow ability” of the borrower to see if his entire operation

could support the payments. Several years after these speculative types of

loans were made, periods of rising costs and falling prices began to generate

“cycles of confiscation” of properties. The borrower’s ability to service debt

based on speculative pricing was at the mercy of the fluctuating markets. I

was with Farm Credit during the Carter Administration. Interest rates went

through the roof and many folks lost their farms and ranches due to

speculative lending practices and high interest. It was an experience none of

us involved will ever forget, no matter how hard we try.

While many conversations can evolve from this basic history lesson, my

reason for presenting this information is centered on two points of interest:

1) We are currently in the same precarious speculative environment as

previously explained

2) To expose that even during the early days of lending based on cash flow

or the later days based on speculation, the parameters used to evaluate the


loan only peripherally addressed what the rancher or farmer was doing to the

land to build its fertility and sustain its value over time. While production

potential was somewhat reflected in appraisals through review of soil survey

maps and general productivity ratings, no one ever seemed to really address

what was happening to the land by the management of the previous or current

borrower/owner. No one measured or monitored the barometers that display

the productive quality and sustainability of the soil. The appraisals used

general soil productivity standards for a particular type of soil as indicated by

Soil Conservation Service mapping. The true “value” of land was and is most

often not directly tied to the “cost” of the land.

What I observed during chattel inspections and appraisal updates could fill a

book called “A Practical Guide to Agricultural Resource Depletion!” I do not

want to belabor this point other than to say, “In the 5 years I worked with

Farm Credit, I only saw one ranch that was dramatically improving in

fertility.” Recent times have seen a significant change in this situation with so

many folks turning to sustainable practices made popular in the last decade.

However what I saw in the 80’s and 90’s were farms and ranches that were in

varying stages of depleting soil fertility and the ability to sustain a profit.

Good conventional farmers were in a slow rate of resource depletion. Poor

conventional farmers were in a rapid state of depletion of resources. The

CRP Program that bribes farmers and ranchers with tax payer money to rest

and restore the land appears to me to be one of the prime reasons we have not

had another Dust Bowl already.

Many of those worn out farms and ranches are now and will be in the future

coming up for sale during a generational transfer of land. The average age of

the nation’s farmer and rancher is well over 60. The next generation of

farmers and ranchers has a daunting task of competing for these nutrient

depleted soils of dwindling true value. Equity finds and cash rich older

farmers are rushing to protect their wealth by investing in Ag land at

astronomical speculative prices and paying cash. Many younger and middle

aged farmers and ranchers are borrowing far too much money in order to

compete with these cash rich buyers. Also, the renters of the land from the

Equity Funds are stepping in to a volatile situation agreeing to rents that are 4

to 5% Return On Investment on the cost of land. 4 to 5 % ROI rent on a

grass ranch costing $ 5,000 per Animal Unit as in times past is a lot less risk

than 4 to 5 % ROI rent on $ 15 – 20,000 per AU as they want now. It is a


formula for disaster as foretold by past experience and exacerbated by point

number 2 – declining fertility.

Fortunately, the last decade has seen an upsurge in pioneering holistic and

organic methods that are increasing organic matter, mineral balance and

overall fertility in agricultural soils. We are also learning how to run more

pounds per acre effectively through Mob Grazing, Management Intensive

Grazing, Savannah Grazing etc. The overall effort however is sorely

miniscule in comparison to the multitude of acres in conventional agriculture

that are depleting fertility reserves even in the face of dramatically rising land

prices. Add to that, the higher the price per acre goes, the greater the

pressure to “use and abuse” the soil to gain maximum yields through harsh

salt fertilizers, anhydrous ammonia, and chemicals on crop ground that

deplete the reserve of organic matter and natural fertility. The higher the

price of land goes, the lower the future “true value” goes due to fertility

depletion on the majority of crop and conventional grazing acres. This

“natural resource cliff” in my opinion has more potential consequence than

the financial cliff our illustrious elected representatives have generated for the

national economy. Ask someone who has encountered the ravages of

Hurricanes Katrina or Sandy which is worse, running out of money or

running out of food?

All good stories have a happy ending. The purpose of this writing is in a small

way to challenge the thought processes of those involved in agricultural land

acquisition and management to assure a happy ending. If funds are borrowed

for land purchase or rents are tied to land prices, the cost must be relative to

production that services the debt and allows adequate margins to be realized

to restore and build the fertility of that land for long term “true value”

retention. In order for agriculture to be sustainable, it must be profitable long

term. Cost has to be related to value.

There will be many who call me naive and out of step, out of time to say what

I have here. For those young critics, ask any person over 60 if life is a straight

line graph going up. They will tell you that life in all its facets has ups and

downs. That is why they call them the “cycles of life.” “Those who cannot

remember the past are condemned to repeat it.” (The Life of Reason by

George Santayana)