Good Fruit Grower

December 2012

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GOOD POINT increased real estate activity in the Pacific Northwest, driven by strong fruit prices and expansion within the tree fruit sector. However, in Michigan, there have been few sales of orchard properties in the lake shoreline region the past three years, and it is expected there will be poor demand in the near future when the effects of the 2012 season are realized. The 2012 season was the tale of opposites for North- B west and Michigan tree fruit producers. In the North- west, apple and cherry producers had record crops, while producers in Michigan picked the smallest crop in memory. In Michigan, unseasonably warm March weather caused fruit trees to break dormancy and bloom up to a month early. The warm weather in March was followed by a number of freezes in April, which decimated the 2012 apple and cherry crops. In the Northwest, most notably Washington State, apple growers produced a record apple crop of 121 million packed boxes and expected to benefit from an otherwise short Northern Hemisphere apple crop. Some growers sustained damage in a widespread hailstorm in July, but most had crop insurance coverage, helping to offset their losses. The 2012 Northwest cherry crop finished at 23 mil- lion 20-pound boxes, more than 13 percent larger than the record crop of 2009. The crop was impacted by rain, hail, heat, and a surplus of small cherries. Michigan cherry growers harvested 11.5 million pounds of cherries, or about 6 percent of the previous three‐year average. A crop loss of this scope not only affected the growers directly, but also impacted local communities and service businesses supporting the Roger Cramer, Northwest Farm Credit Services Real estate activity by region In the Pacific Northwest, real estate is heating up; but Michigan activity is slow. eginning in late 2011 and continuing into 2012, there's been fruit industry. Some of the losses will be offset by higher crop prices and crop insurance proceeds. However, few insurance options existed for cherry producers. It is too early to tell what the long-term impact to asset valua- tions and farm businesses will be. Certainly, growers will be making some changes to business plans in response to the 2012 crop losses. Real estate In the Northwest, real estate activity in the tree fruit orchard areas was very slow from 2010 until about a year ago. Since late 2011, and continuing into 2012, there has been increased market activity. Strong fruit prices and expansion within the tree fruit sector are driving land values. Open irrigated crop values have increased from an average range of $4,000 to $6,000 per acre up to a range of $8,000 to $10,000 per acre within a very short time frame. There is significant market strength, and this trend is expected to continue through the end of 2012. Market demand exceeds the available supply, based on realtor listings. The prevailing strong market condi- tions for good quality land that is suited for permanent plantings have increased because of competition between vertically integrated fruit packers, investment companies, and adjoining commercial growers taking advantage of lower interest rates and better commodity returns to expand their operations. Sales of better-than-average orchard blocks have sold at elevated levels. Average-to-better quality orchard tracts have sold in the $8,500 to $12,000 per acre range within the last 12 months, and the better apple/cherry orchards have sold for $20,000 per acre. But real estate listings in Michigan paint a different picture. Throughout the past three years, there have been very few sales of orchard properties from Michigan's Lake Michigan shoreline. Sales of Land is scarce and costly Even modest pieces of land are being snapped up. by Geraldine Warner F armland has become scarce and expensive as growers plow their profits back into their operations. Tree fruit growers who have been making good profits in recent years and might be looking to expand are competing for land with other farm- ers, who are also enjoying a profitable period. "General agriculture land is in very short supply," reported Steve Weber at Clark Jennings & Associates, Inc., an agricultural real estate company in Yakima, Washington. "All the commodity crops, with perhaps the exception of hops and dairy, have been so strong in the last couple of years that we have a lot of farmers with a good deal of capital or access to capital from the banks. So, anytime we get something on the market—good, bad, or indifferent—we seem to have a boatload of people wanting to buy it." Weber said tree fruit growers are finding that the best thing to do with their profits is put them right back in the ground. There are not many other attractive investment options, and, in some cases, family companies might feel they need more acreage as the older generation turns the business over to their children. "Normally, good ground will always sell at a premium price, but we're finding very modest ground that people are rushing to get, just to pull all the trees out and put new ones in." Weber said land in the Quincy or Babcock Ridge area that might have sold four or five years ago for $4,000 an acre—which seemed a high price at the time—is selling for up to $10,000 an acre. 38 DECEMBER 2012 GOOD FRUIT GROWER "I think you'd find almost those same kind of prices in Mattawa," he said, not- ing that land in that area has good potential for horticulture, viticulture, or row crops. What's fueling the high prices for row crops is the large amount of corn being grown nationwide for ethanol. Jim Weitzel at Gary Mann Real Estate in Ephrata, Wash- ington, said the supply of agri- cultural land is very tight, demand is very good, and prices are high and rising. A planted orchard can sell for $11,000 to $12,000 an acre, he said, and ground mature, productive orchards or vineyards rarely take place. Instead, ground typically changes hand once plantings have reached the end of productive life and the land is ready for significant capital reinvestment. Sites suitable for orchards range from $4,000 to $7,500 per acre. Sites suitable for wine grapes have sold for upwards of $19,000 per acre. Emphasis on efficiency The fundamentals of land values are the same for orchard ground as in other areas of agriculture, with greater emphasis on efficiency. Larger commercial farming operations have been expanding, vertically integrating, and have made up the principal buyers in the market. As always, location is a key factor. Blocks located farther away from the farming headquarters, or in more isolated areas, are the first to be offered to the general market. Blocks nearby, or on adjoining land, often sell at a premium. The majority of sale properties are marketed and sold privately, without involvement from realtors or brokers. The effects of the 2012 season have not been realized by the market at this time, but it is expected that there will be poor demand and little expansion over the next two to three years in Michigan's tree fruit producing areas as equity positions recover. —GreenStone Farm Credit Services of East Lansing, Michigan, also contributed to this report. "General agriculture land is in very short supply." — Steve Weber without trees for $9,000. He has customers who have asked him to watch out for ground, and any- thing he finds, he can sell quickly. Some people are looking themselves for land they like and asking the owners if they're interested in selling, without it even going on the market. Weber said he's been encouraging growers who might want to sell their farms to do so while the capital gains tax is 15 percent. The rate was lowered from 20 percent in 2010 and is set to revert to 20 percent on January 1. "If you ever thought about selling, this is the time to do it," he said. •

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