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California farmland returns shrink - even as rains return

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The end of California's drought has not answered all its farmers' problems.

Returns for US farmland owners in 2017 made their weakest start to a year on records going back to 1992, according to data from Ncreif, the National Council of Real Estate Investment Fiduciaries.

At 0.49%, total returns for the January-to-March period undershot the 0.65% reported for the first three months of 2002 which had represented the lowest reading for a first quarter.

And the weak start to 2017 reflected a rare negative return in the Pacific West, which is centred on California and has been a star performer, helped by strong returns to the state's almond and tree fruit farmers.

"The Pacific West was the only region with a negative total return in the first quarter as permanent cropland lagged, which accounts for 179 of the 220 farmland properties [surveyed] in the region," Ncreif said.

Steep decline

The Pacific West's performance represents a marked turnaround on that in the last three months of 2016, when it offered the best returns of all eight regions in which Ncreif divides the US. Array

2017: +0.49%

2016: +1.38%

2015: +2.08%

2014: +2.31%

2013: +5.44%

Source: Ncreif. Returns comprise both and price change and income

The state is responsible for two-thirds of US fruit and nut output, as well as more than one-third of vegetables output, according to official data.

Ncreif flagged an "extended divergence in total farmland returns by property type since 2012", with permanent cropland outperforming in a way "unique to this cycle" in the landmarket.

"Historically, total returns for these two categories are much closer as shown by the since-inception [1992] return for permanent cropland of 12.40% versus 10.60% for annual cropland."

Price divergence

The slide in Pacific West returns also defies an apparent improvement in California's agricultural output prospects, with deluges - which have brought a record wet winter to the northern Sierra Nevada mountains, a moisture reserve for much of the state - following on from persistent drought.

Drought conditions which began building in California early in 2012 had spread to more than 90% of the state by May 2013 – and remained there for three years, until the return of rains which have shrunk the reading to 8.2% of the state's area, according to latest US Department of Agriculture data.

All of the state's winter wheat was rated in "good" or "excellent" condition in USDA data overnight.

However, the prospect of improved Californian production has also undermined prices of the crops in which the state is a big player, with US values of fruit and tree nuts 1.7% lower in February than a year before, according to the USDA.

By contrast, prices of oilseeds, as popular in the likes of the Corn Belt, were up 15%, a reflection of strong Chinese soybean imports.

Land prices ease

In fact, returns from Corn Belt farmland returned to positive territory in the first three months of 2017, if only to stand at a modest 0.35%, although that is the best performance in nearly two years.

The southern Plains, known in particular for winter wheat, cotton and cattle, recorded the best returns, of nearly 2%, against a backdrop of recoveries in prices in particular of cotton and cattle.

The overall US returns reading comprised 0.51% in income, with land values seen depreciating by 0.02% - a third successive quarter of decline, following on from a six-year spell of unbroken appreciation, according to Ncreif data.

By Mike Verdin

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