California agriculture is in a “Goldilocks economy” at the moment — it's not too hot, not too cold, but just right, says Mark Clarke, Rabo AgriFinance, Santa Maria.
The veteran of 34 years in real estate investments traced the economy and its trends during the spring outlook conference of the California Chapter of the American Society of Farm Managers and Rural Appraisers (ASFMRA) at Sacramento..
Clarke has worked exclusively in financing agricultural real estate on the central coast of the state since 1994.
Joining him in the reports was Mike Iliff, Fresno-Madera Farm Credit, Fresno, an accredited rural appraiser who draws on 35 years of experience to analyze land values in California's Sacramento and San Joaquin valleys.
In summarizing recent trends leading up to the current season, Clarke says California farm land values in general increased dramatically in 2004 and 2005, and although they rose again in 2006, the pace was slower.
“There's generally been a lot of positive news in agriculture over the past three years, and that has translated into ever-increasing values.”
But, he added, that hasn't meant ever-increasing income from the land.
Strengthened exports due to the weaker U.S. dollar and relatively low interest rates have also been positives.
Prominent in shaping the market in 2006 were “1031 exchanges” of property. Under Section 1031 of the U.S. Internal Revenue Code, these real estate property sales allow the seller to reinvest the proceeds to buy a like-kind property and defer capital-gains taxes.
“They've had a significant impact on the agricultural market, and, in fact, on all types of real estate markets during the past several years,” Clarke says.
But he expects the trend will diminish during 2007, with fewer transactions due to the weakened residential market.
Supporting his “Goldilocks” analogy, Clarke says the good news includes low interest rates and almonds continuing to be profitable as the market absorbs massive crops. Commodity prices are generally stable and, although dairy feed costs are up, milk prices have also risen. Liquidity is available in both debt and equity markets.
Less positive are concerns with some elements of the wine grape industry — lack of contracts and heavy bulk wine inventories — although generally the industry is stabilizing acreage and is coping with strong foreign wine competition.
The 2007 season has taken some lumps from the January freeze, labor spot shortages in several locations, and E. coli worries in fresh produce.
And Clarke says, “Some folks are starting to remember risk; there is still risk in financial and real estate transactions. For a long time, particularly in residential real estate, we have forgotten about that concept.”
His analysis of land values in coastal counties during 2006 indicated North Coast vineyard values continuing upward in Napa and Mendocino Counties and holding steady in Sonoma and Lake Counties. Although demand was strong, sellers were few.
“We saw, for the first time, uncontracted — and, in some cases, unharvested — grapes. This is probably a temporary phenomenon, but is clearly a hangover from the big 2005 crop.”
The statewide crush for 2005 was a record 4.3 million tons, while projected figures for 2006 show nearly 3.5 million tons.
The small vineyard market in the region continues to be influenced by the residential real estate market, particularly buyers who want to build a home on a 20-acre vineyard.
The best vineyard properties on resistant rootstock in Napa County are running about $280,000 per acre, up from $200,000 in 2005, while crop values there have flattened, with Cabernet Sauvignon around $4,000 per ton and Chardonnay slightly above $2,000. The lowest prices in the region for vineyards on resistant rootstock are in Lake County, at about $35,000 per acre.
Clarke says demand in 2006 was strong for all types of property along the Southern and Central Coasts. “Generally, produce growers had a better year in 2006 than in 2005. The E. coli issue is significant, and changes will be coming to the produce industry. Costs will be rising, and growers will be trying to figure out how to recover some of those costs in their prices.”
Prices for vineyards in the region from Monterey to Ventura are starting to improve, particularly for small parcels.
Open irrigated farmland prices in Monterey County range from about $15,000 per acre for rolling, lower-producing ground to $50,000 for prime, vegetable land from Salinas westward to the Pacific Ocean.
Many in Monterey County, Clarke notes, believe the minimum price for good, level, irrigated land from King City to Salinas is $30,000 per acre.
Adding $20,000 in development costs to each acre for vineyards on this type of land would not be supported by the present value of the grapes produced, so it's not likely more vineyards will go in, he says.
But, in San Luis Obispo and Santa Barbara Counties, where Pinot Noir grapes have brought more than $2,000 per ton, open land suitable for wine grapes has been sold in the $30,000 to $40,000 per acre range for development as high-density (1,500 to 2,000 vines per acre) vineyards. Such development could bring total investment per acre to $75,000.
In the southern inland valleys, movement of dairies from the Chino area elsewhere in the state, via 1031 exchanges, meant that properties sold for as much as $600,000 per acre during 2006, versus a peak of $300,000 the previous year. Lower demand for residential real estate, however, has leveled off prices.
Effects of the 1031 exchange phenomenon were also seen in higher prices of open irrigated land in the Imperial Valley, which reached $6,000 in 2006, twice what they were in 2004.
“A lot of that is driven by what's going on in Yuma, just across the Colorado River, where produce ground has gone for $25,000 an acre because of 1031 exchange money coming out of the Phoenix area,” Clarke says.
Land values in Central Valley counties continued to increase to record levels for most crops, although Iliff says the rate of increase has slowed.
At the same time, he says, “demand for ag properties from all types of buyers remains very strong. The fundamentals for most crops continue to be favorable.”
But Iliff also warns: “Right now, risks appear to be more at levels that are too high rather than too low. We'll have to see how that plays out.”
A sampling of 2006 land values in Central Valley counties shows almonds in Stanislaus and Merced Counties reaching the $20,000 to $25,000 range and stabilization at $12,000 for almonds in counties of Butte, Colusa, Glenn, and Tehama.
Wine grapes in Fresno and Madera Counties rose from just over $8,000 in 2005 to more than $11,000 in 2006.
During the same period, open land in Kings County ascended from about $6,500 to $8,000. Rangeland in eastern Fresno County spiked from less than $1,500 to more than $3,000.
Copies of “2007 Trends in Agricultural Land and Lease Values,” which provides charts and narrative for each production region, are available at $15 each from the California chapter of ASFMRA at www.calasfmra.com.