A YEAR after the worldwide economic meltdown, farmland values across the Corn Belt have largely escaped the dramatic declines affecting housing and commercial real estate markets.

But farmland values — which declined 2 to 10%, depending on the state, in the months following the meltdown — now are at a tipping point that could lead to long-term stability, lower prices or even a return to the white-hot market that saw values double from 2004 to 2008 in many parts of the Corn Belt.

Despite the retrenchment, land values remain at or near historic levels. And productive farmland continues to be in high demand. A 380-acre Illinois tract sold at auction in September brought $7,600/acre, notes Rex Schrader, president of Schrader Real Estate & Auction Company. “I think it brought every bit as much as it would have a year ago,” he says.

The earnings equation

The emerging trend in land values and rents in the coming years — whether up, down or sideways — depends on net farm income, according to land economists.

“Right now, land prices and rents are relatively stable,” says Gary Schnitkey, an ag economist at the University of Illinois who tracks land prices across the state. “I think they will remain stable through next year. What happens after that depends on the ag economy. If returns stay low through 2010, that is when we could begin to see land prices [and rents] decline.”

Iowa State University ag economist Mike Duffy agrees, as does Jim Farrell, president of Farmers National, the large farm management and real estate concern, which does business across the Midwest.

“We could have more pressure on rents a year from now, depending on crop prices in 2010,” Farrell says. “But for 2010, we are seeing a pretty stable rental market, as long as rent was already at market levels.”

Budgets for the 2010 crop show how close land values and rents are to the balance point in many areas. For example, Illinois ag economists project that returns for corn on the state's most productive farmland will be about $90/acre above breakeven in 2010, including rent. Rent on this $7,000/acre land is pegged at $210 (3% of the land's value). Earnings assume 190 bu./acre corn valued at $3.75/bu.

In contrast, Illinois budgets show that the same acre of corn showed a slight loss in 2009. “Returns in 2009 are some of the worst we've seen in this decade,” Schnitkey says. “But that's coming off two pretty good years.”

Even if returns in the coming years suggest lower rents, competition from farmers expanding their operations will continue to put upward pressure on rents. “Rents have a direct correlation to land value, but farmers still have a voracious appetite to rent more land,” Farrell says. “So cash rent also is a function of demand.”

Values vary

Across the Corn Belt, the negative impact on farmland values of the poor general economy and tighter bottom lines at the farm level varies by region and land quality. But the pattern of the price drop is notable.

“We were in a hot land sales market until late 2008, with record auction activity,” Farrell says. “It ran strong until the last quarter of 2008, when it started to back off. Prices continued to fall through the first quarter of 2009.” By March of 2009, the gains from early 2008 had been erased.

The land market has been mostly stable since then across most of the Corn Belt. Exceptions include western Nebraska and parts of Kansas and Missouri, where prices have continued to climb, Farrell says.

A USDA report issued early in 2009 captured the beginning of the downward cycle. According to USDA, the average price of cropland fell 3 to 6% across much of the Corn Belt from January 2008 to January 2009. The stats, state by state, are: Illinois, -3.7%; Indiana, -4.6%; Iowa, -4.9%; Missouri, -5.6%; Michigan, -3.2%; and Minnesota, -3.3%.

Land values haven't fallen everywhere, however. According to USDA, Wisconsin cropland values were up 1.4%, as were values in Kansas, up 2.9%, and Nebraska, up 6.3%. South Dakota cropland values held even, while they fell 1.2% in North Dakota.

More recent reports confirm that cropland values continued to decline for several months after January. For example, a September report by the Iowa Land Institute showed that values had declined about 10% through mid-2009. State-by-state land value surveys (slated to be released after this magazine goes to press) will provide a clearer picture of value shifts.

Farrell thinks the surveys will show that value declines vary with the quality of the farmland. “We have seen as much as a 10 to 15% drop in the value of poor-quality land, including recreation land,” he says. “In many areas, top-quality land has not backed off.”

Seller's market

What is notable about the 2009 land market is its thinness; there are far fewer land tracts for sale than in recent years. Another factor is a reduction in the amount of money that lenders are willing to provide for land purchases. Two years ago, lenders were commonly willing to lend 60 to 75% of land's market value. Now, a lending ratio of 50 to 60% is more common, Farrell says.

“We have a seller's market,” he says. “We have a lot more people looking for land than are willing to sell. Even those who want to sell are holding back. They won't make major decisions when everything is up in the air in the general economy. There just is a great deal of uncertainty.”

The primary land buyers continue to be operating farmers, with outside investors making up 20 to 30% of buyers, Farrell, Duffy and Schnitkey confirm. Over the past couple of years, this outside investor group has included a growing number of what Farrell calls nontraditional investors. These investors have no previous ties to agriculture and haven't invested in farmland in the past, but they are bullish on agriculture. “Last winter, these people backed away from the market,” he says. “But now they are back in the market.”

Healthy pause?

Both Schnitkey and Duffy say that this year's modest land value decline may be healthy to the extent that it hasn't been an abrupt drop, as occurred in the 1980s.

Early in the decade, so-called 1031 land swaps — named after the section of the IRS code allowing land exchanges to avoid capital gains taxes — fueled the land market in many areas, even though commodity prices didn't justify them.

“I was more concerned about land prices tumbling then than now,” Schnitkey says. “As the urban market for neighboring farmland dried up 1031 exchanges, we could have seen the market decline markedly.”

Then the ethanol boom extended the land value rush. But it ended quickly enough to avert an '80s'-style catastrophe, Duffy adds.

“Early in 2008, the land market had the exuberance of the ethanol boom built into it,” he says. “It was seen as the new golden era of agriculture. Eighteen months later, it's gone, but with a relatively modest decline in value. We were lucky. The longer it would have remained a ‘golden era,’ the more that people would have forgotten the lessons of the '70s and '80s.”