Local experts say farmland 'bubble' non-existent

Stanley Xavier JrStanley Xavier JrMemories of a real estate bubble bursting are all too real six years after the collapse of the U.S. home market.

That’s led to fears that farmland real estate could be headed in the same direction, threatening a financial collapse for San Joaquin Valley farmers.

But homes and crops are two different things and despite soaring land values, continued high-demand for farmland, extensive nut tree plantings, surging demand for nuts at home and abroad, high wholesale prices and big profits, real estate and appraisal experts say there is nothing to fear, at least in the near future.

“This is not a bubble, but typical land sales,” said Stanley Xavier Jr., president and chief executive officer of Correia-Xavier Inc., an appraisal firm in Fresno. Xavier spoke to an overflow audience of farmers and real estate representatives at the 2013 Fresno Agricultural Valuation Symposium: Bubble or Just the Beginning, held Wednesday at the School of Business on the Fresno State campus.

“If the price of commodities goes down then you have a bubble,” Xavier said. “I don’t see it.”

He explained, "A bubble occurs when income does does support value," adding that land values follow commodity prices.

"When commodity prices go up, the corresponsing permanent planting value or land value  goes up," Xavier said. "When commodity prices go down, the corresponding permanent planting value or land value goes down. Agricultural land values track with commodity prices."

He said a bubble occures when commodity prices go down, but the corresponding permanent planting value or land value continues to go up.

That it not the case right now.

In addition, high land pricing and a limited amount of good farmland available should help keep the threat of over-planting in check.

Mechel Paggi, director of the Center for Agricultural Business at Fresno State, also provided a positive assessment of agricultural real estate. “We’ve been experiencing a pretty good ride,” Paggi said. “Values are going up.”

Based on the ratio of land to crop values, Paggi described the current market as strong. That’s despite average irrigated land values of $12,000 per acre.

“These are not inflated land values,” he said. Tree fruit is not overpriced at $12,000 to $18,000 an acre either, Paggi said, adding.

Farmland values should continue their rise over the next few years. Xavier presented a chart that showed that walnut property, for instance, would eventually exceed $30,000 per acre for good producing land.

“This is not a situation that would be described as a bubble,” Paggi said.

That is because farmers are not only reaping profits, but as farms grow they become even more profitable, he explained. In some cases, investors are coming in and providing the money needed for farmers to expand their enterprises.

Paggi added that he expects interest rates to stabilize at 3 percent to 4 percent over the next few years.

Panel at Fresno Ag Valuation SymposiumPanel at Fresno Ag Valuation SymposiumDale Samuelian, real estate broker for Pearson Realty in Fresno and a panelist for Wednesday’s symposium, said ag values are strong. “Farmers are making tons of money,” he said. “Some are buying land with cash.”

Paggi said famers face no threat of overbuilding like homebuilders when purchasing land. “You can’t overdevelop like in residential real estate,” he said.

Markets should continue to grow, although it could be a bumpy ride at times, Paggi said.

“There is a need for food,” he said. “Long-term demand will prop prices up. And interest rates will stay low.”

Paggi added, “This is not a bubble fixing to burst.”

Still, farmers have to be careful where they purchase land. Water availability is a major factor. Panelist Mitch Millwee, Kern County branch manager for Farm Credit West, said that soil quality, location, water supply and water quality are all vital in running a successful farm. He said farm loans are available for good land and banks are seeking a stable place to put their money.

Some farmers are buying closed-down dairy farms to tear down and plant nuts or other crops. Dairy operators had a tough time this year and the number of dairies in the area is expected to continue falling. In addition, grape vineyards are more costly to operate than nut orchards and the transformation of vineyards to nut orchards is forecast to continue.

From 1998 to 2012, 171,699 acres of vineyards were removed within the San Joaquin Valley. “Most vineyards went into almond orchards,” Xavier said.