'Fiscal cliff' stoked fears of spike in capital gains tax

By MATEUSZ PERKOWSKI

Capital Press

Farmland values increased 10 percent nationwide in 2012, a real estate investment trade group says.

"Farm prices are clearly on the rise," said Jeff Havsy, research director for the National Council of Real Estate Investment Fiduciaries.

The nonprofit trade group tracks the values and incomes of more than 500 farmland investment properties across several regions of the U.S. that are collectively worth $3.5 billion.

Including income in addition to appreciation, investors tracked by the index earned returns of 18.5 percent on their assets last year, up from roughly 15 percent in 2011 and 9 percent in 2010, according to NCREIF.

Much of the surge in land values occurred late in the year, the group found.

The "fiscal cliff" dilemma caused farmers to anticipate higher capital gains taxes, said Jim Farrell, CEO of the Farmers National Co., which manages and sells farmland.

"The market was accelerated by tax law in the last quarter of 2012," Farrell said. "People were pushing land onto the market to beat the capital gains tax change."

While land appreciation was the most robust in the Corn Belt, at 20 percent, values increased across the regions tracked by the index, including the Pacific Northwest.

Consistently rising property values can be indicative of a bubble that will eventually pop, but it's also possible for the appreciation rate to level off before the market overheats, Havsy said.

"Which way this one is going to go, I have no idea," he said.

Aside from strong crop prices, investors are buying farmland due to fears that the U.S. government's "easy money" policies will lead to inflation, Havsy said.

"People are looking for alternative investments," he said.

A drop in commodity crop prices would be a setback, potentially causing farmland values to drop 15 percent to 20 percent, Farrell said.

Exactly how badly that would impact the agriculture industry's financial outlook would depend on farmer indebtedness -- a tough metric to know, since many growers rely on loans from vendors rather than banks, he said.

"A lot of financing is done at the point of purchase," Farrell said. "It's become diffused."

The rising value of U.S. farmland is strongly tied to the Federal Reserve's monetary policy, which has kept interest rates low, said Mitch Morehart, an economist at USDA who studies farm finances.

As long as that policy stays the same, "the increases are consistent with the potential returns to ownership," Morehart said.

For example, the severe economic downturn in agriculture during the 1980s was precipitated by sharp interest rate hikes that hindered debt repayment and reduced demand for farmland, he said.

While the Federal Reserve wants to keep interest rates low for the foreseeable future, its ability to do so will depend on investors' willingness to buy government bonds, he said. If investor demand for U.S. Treasury bonds slackens, interest rates must rise to rekindle their enthusiasm and allow the government to continue borrowing.

Increased indebtedness by the U.S. may eventually scare off investors, forcing the Federal Reserve's hand at some point.

"At some point, they can't ignore our debt situation and how that influences demand for U.S. Treasuries," Morehart said. "That's the debate -- when does that occur?"