Farmers, outside investors bid up local ag land

The Bakersfield Californian |  Nov 26 2011

Farmers, outside investors bid up local ag land

BY JOHN COX Californian staff writer
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Kern farmland has become one of the county's hottest investments, due in part to broadly higher commodity prices and growing demand for land with vested water rights.

People in the industry say large farming companies are taking advantage of low interest rates and bidding against institutional investors with few other attractive options for earning income.

While some wonder whether the market has the attributes of a real estate bubble, others say rising ag land prices are rooted in long-term supply and demand projections. They note that farmers are driving the market more than people outside the industry are.

"This cycle's different in that farmers are paying these prices, and they're not letting investors take a purchase opportunity away from them," said Robb Stewart, a farmland and ranch property specialist at Bakersfield's Pearson Realty.

The implications are mixed for small local farmers who remain in the market. On one hand, the prices benefit those who already run their own farming operations. On the other hand, high prices may limit their ability to compete against large competitors.

Melon and lettuce farmer Danny Andrews provided one recent example. He had his eye on about 400 acres of agricultural land south of Bakersfield. Aware that the owners were looking to retire, he made them an offer last year.

The landowners held out, however. That was the right decision in retrospect: A large grower of almonds and grapes ended up paying more than Andrews had offered.

Although Andrews liked the location and the water rights that came with the property, he expects he'll get along fine without it. It just frustrates him that farmland prices have pushed small farmers like him out of the market.

"It's made it tough for us to compete," he said, "because the prices are almost double what (they were) just a few years ago."

At the same time, the surge in ag real estate prices has been good to farmers whose children don't want to take up the family business. The prices have made their nest egg bigger.

Also, farmers who own the property they work are sometimes able to borrow against its high value and then invest that money in nearby farmland.

The strong prices these days "makes it easier for (banks) to justify loaning you money," Rosedale farmer Richard Jelmini said.

Climbing prices

With the exception of range land, most Kern County agricultural property has grown in value in recent years, according to a recent report by the California chapter of the American Society of Farm Managers and Rural Appraisers. The report noted that the rate of price increases for open farmland in particular has accelerated since the second half of 2010.

The most valuable local farmland contains pistachio groves. Such property fetched $16,000 to $24,000 an acre in 2010, up from $15,000 to $20,000 in 2007, according to the report.

It said Kern citrus property went for $8,500 to $14,000 an acre last year, as compared with $8,000 to $11,000 three years before.

Meanwhile, table grape property in the county reached $12,000 to $15,000 an acre in 2010, much better than the 2007 price of $10,000 to $12,500, according to the report.

Rental activity was "steady" within these and other categories of Kern farmland last year, the report says, while their rental price trends were "stable."

Commodity prices surely figure into the trend. Many crops grown in Kern County are selling at historically strong prices.

Between 2009 and 2010 alone, the gross value of Kern's agricultural output jumped 31 percent to $4.76 billion, the county reported last spring. Authorities noted that some of that increase had to do with better pollination and an increase in water available for farming.

With so much money being made, it's no wonder farmers are holding out for only the best purchase offers, said Stewart at Pearson Realty.

"The problem is, people are making money," he said, "and they don't want to sell anything while people are making money."

But other factors appear to be at play as well, including expectations for food and water shortages over the long term, not to mention a lack of good investment opportunities elsewhere.

"The stock market's pretty wild. The bond market's nothing. CDs are zero," said Steve Runyan, a Bakersfield-area agricultural real estate appraiser, "and so you have a tremendous amount of money in pension funds and investment funds of some kind that need some kind of return."

Runyan said some of his clients for local farmland are international companies looking at global population trends.

"I think some of these companies are realizing that we probably should buy some of this land because they're not making (land) anymore and it's going to be needed to feed the world population."

Another bubble?

Some wonder whether there is enough underlying support for the high price of ag land, or whether this is simply another real estate bubble.

The managing director of institutional investor UBS AgriVest LLC, Jim B. McCandless, said his firm has owned and rented out Kern County farmland since the 1990s. But he said it hasn't bought any property here for the last few years despite the relatively high quality of local water, soil and agricultural operators.

Sometimes there are just no opportunities for the company to buy because farmers are doing well by working the land they own, McCandless said. But other times, he added, the company passes up offers because the price of land rises faster than the rental income.

"Sometimes it gets a little disproportionate," he said.

Although his company is cautious whenever prices rise quickly, McCandless wasn't ready to call Kern's ag real estate market a bubble. For one thing, the county produces many kinds of crops, and that diversification acts as a good price cushion.

Runyan, the local appraiser, pointed to factors suggesting that recently high purchase prices may be justified.

With interest rates low, he said, farming companies are not saddled with large debt payments that could hurt them if conditions change. Also, many investors he sees pay cash as opposed to purchasing with borrowed money, which he said gives them a more solid position.

"I don't see a lot of stuff pointing to a bubble," he said.

Land for water's sake

Access to water has always been a major factor in the price of farmland, but lately it is having a bigger effect because of fears of future water shortages.

The best water access is generally found on the eastern side of the Central Valley because of vested rights to rivers such as the Kern, said Sarge Green, project manager at Fresno State's California Water Institute.

Meanwhile, uncertainties associated with water from the Sacramento Delta may hurt demand for land served by water from up north, he said.

Farmland tied to any water source could become more valuable in years to come, he said.

This could become more pronounced as the Los Angeles Basin's population outgrows its water supply and looks north for a drink.

"People buying land here with that kind of potential in mind are thinking long term," Green said.