The Federal Reserve Bank of Kansas City, ag lenders and university farm management analysts have been warning for the past couple years that we could be headed for a farm land financial bubble, due to the very rapid increase in farm land values in recent years. There appears to be evidence that a reduction in average land values may be occurring in some regions of the U.S., based on recent land sales summaries. However, some land professionals indicate that land values have stabilized, and in isolated cases even increased, in portions of the Midwest since January 2014, due to recent strengthening of cash corn and soybean prices.
Record U.S. net farm income levels in recent years has lead to major increases in land values in many areas of the U.S. during the past three years. There was a 13.0% increase in average U.S. farm land values from mid-year 2012 to mid-year 2013, which followed a 14.5% increase in U.S. farm land values a year earlier. The year-to-year increases from 2012 to 2013 were the highest in the Midwestern and Plains states, with North Dakota recording a 41.5% increase, followed by South Dakota at 30.2%, Minnesota at 19.8%, Nebraska at 19.0%, and Iowa at 17.8%. U.S. average farmland values have increased every year since 2000, except in 2009, with increases above 10% reported in each of the last three years (2011, 2012, and 2013).
One of the best sources of farm real estate values in Minnesota is the U of M’s Land Economics website. This site is updated annually after Sept. 30, and accesses a data base of various land values, based on farm land valuations reported to the state revenue office by county assessors offices throughout the State each year, which are adjusted annually based on actual land sales in a given county. This website allows for selected sorts by county, state economic regions, watersheds, etc., as well as by types of land.
Many times we hear discussions regarding the extreme high land sales that occur in a county or region, but we do not often focus on the average of land sales in that county or region. Based on the data gathered from area county assessors offices in south-central Minnesota, which was compiled and reported to the U of M, there was a substantial increase in the average value per acre of farm land sold in most area counties in the past three years (2011-2013). Interestingly, the increases in the average land sale values were generally less from 2012 to 2013, as compared to 2011 to 2012. It should be noted that 2013 featured a significantly reduced number of land sales in most counties compared to 2011 and 2012, which can result in individual land sales having a greater effect on average values.
The Iowa Realtors Land Institute released their latest survey of trends in average values of Iowa farm land in March, 2014. This survey of land professionals, which is conducted every six months, includes realtors, farm managers, and appraisers that specialize in tillable farm land in Iowa. The most recent survey showed a decline of 5.4% in average Iowa farm land values from the previous survey in September 2013. The largest six-month decline in land values was over 7% was in northeast and north-central Iowa, while the smallest decreases were in southern Iowa. The annual decline in average Iowa farm land values from March 2013 to March 2014 was 4.2%, which was the first annual decline in average land values since 2009.
There seem to be some indicators that land values in southern Minnesota may be showing similar trends to the Iowa data. Private reports of land sales from portions of south-central and southeast Minnesota in recent months have indicated some decline in average land values, generally 10% or less. The decline seems to be the greatest in areas that were impacted by the poor growing conditions and prevented planted crop acres in 2013, and on poorer quality farm land. Similar to 2013, the volume of land sales early in 2014 seems to be greatly reduced from previous years.
Farm land values have risen quite dramatically in recent years in most areas of the Upper Midwest, including south-central Minnesota. The land value increase has been driven by strong commodity prices, high levels of net farm income for crop producers, and by very low long-term interest rates to finance real estate. The moderation in commodity prices, along with the potential for increases in ag real estate interest rates, will likely continue to put downward pressure on land values. Some farm management analysts have suggested that a combination of these factors could result in average land values dropping by as much as one-third from the highest levels in the next few years.
As we have seen in recent years, any enhancement of corn and soybean prices tends to stabilize average land values fairly quickly. Profitability in the livestock sector is also likely to be much stronger in the next couple of years, which could also be a positive factor for land values. On the negative side, overall net farm incomes for 2014 and 2015 are likely to be greatly reduced from the recent high levels, and most analysts expect long-term interest rates to start rising in the next couple of years.