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Land Prices, Drought And Irrigation Water

Land Prices, Drought And Irrigation Water

Market for land affected by several forces in Nebraska.

Epicenter is a word cropping up a lot recently around Nebraska. Cattle producers and University of Nebraska-Lincoln folks have attached that label to the state's beef industry—as in "Nebraska is the epicenter of the beef industry." And because Nebraska leads the country in irrigated acres and irrigation is the foundation for continued excellent crop yields now and into the future, I've even heard "epicenter" used for all of Nebraska agricultural and its ability play a key role in feeding the world.

Center-pivot irrigated cropland prices jumped 27% last year.

Unfortunately, Nebraska can lay claim to another epicenter, as in the epicenter of the persistent drought. The U.S. Drought Monitor Map tells that story clearly. The darkest of the maroon shades—exceptional drought or D4--hovers over much of the state like an ominous cloud, and a dry cloud at that.

There are the obvious ramifications of that drought—depleted pastures and rangeland production and resulting culling of cowherds, shriveled dryland crop yields, and high irrigation demands and the impact of that on surface and groundwater supplies.

Drought also is playing a key role in the dynamics of agland values in Nebraska. Even before the drought came in with a vengeance, land prices were soaring due to equally soaring crop prices. That's happened all over the Midwest and Corn Belt states.

The land-buying frenzy continued in 2012 and into early this year, and drought for now doesn't seem to be slowing it down.

When the fever will cool down is hard to tell, but the recently released University of Nebraska annual land values report reveals some interesting points.

One is the hot market for center pivot irrigated land, as well as dryland acres with irrigation potential, although this latter category seems to be shrinking. Nebraska's natural resources districts have hung out the ''no-new-wells" sign in about half of the state and a half-dozen NRDs have some form of groundwater pumping allocation in place. That means that when certified irrigated acres come on the market, it's creates a land rush.

Bruce Johnson, UNL ag economist and coordinator of the annual land values report, says that it is, in effect, a matter of buyers searching for water when pivot-irrigated land comes on the market.

Irrigators for the most part are becoming more efficient in applying water, using new and exciting technologies to do so. But that won't forestall the drop in groundwater levels that will be revealed in another statewide report coming out in late spring.

Farmland remains a good investment, but Johnson wonders if returns on that investment are sustainable over the long term, especially when per-acre prices for center-pivot irrigated land have been reported as high as $14,000 to $15,000 an acres. Sales of $10,000 or more per-acre aren't uncommon.

Some of the real estate and land management folks reporting data for Johnson's survey think the Nebraska land marketed may have topped out and could soften in 2 to 3 years. 

Yet, farmers are making a majority of the purchases, as opposed to outside investors. Perhaps they are investing in land in order to help sons or daughters get their start. A big share of some of those sales has been made with cash.

Most are banking on the expected growing demand globally for food in the coming years.

But what happens if the drought ends—it will rain someday—and corn prices drop to near $4 a bushel? Considering the way input costs have soared, that's not a bright economic picture.

There are a lot of pieces to the land market puzzle today—food demand, current high crop prices, drought, irrigation water availability or lack of water availability, current and future regulations, low spring soil moisture, the worsening forage and cattle inventory situation. How we manage these pieces will be critical in the coming months.

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