November 27, 2010
The price of farmland has continued to climb the past several months—as corn and soybean prices have gained steam. In its recently released survey results, the Chicago Federal Reserve Bank reported good farmland has, as of October 1, 2010, appreciated 13% in Iowa compared to a year earlier.
In the monthly "Land Values" column that will appear in the December 2010 Wallaces Farmer magazine, a wide range of land sale prices is reported. Land in Iowa currently ranges from $55 to $125 per CSR point (Corn Suitability Rating) per tillable acre. It depends a lot on the quality of the land. Neighboring farmers are the predominant buyers, although investors are stepping into the market.
For example, in Plymouth County in northwest Iowa, 80 acres of bare farmland recently sold at auction for $7,500 per acre. That farm has 74 crop acres and a 54.8 CSR. In Hancock County in north central Iowa, 98 acres sold at auction for $6,442 per acre. It has a weighted average CSR of 74.9 and 95.8 tillable acres. In Mills county in southwest Iowa, a 371 acre farm sold for $2.3 million. It has 340 crop acres with an 82.6 CSR. Sale price equates to $6,260 per gross acre or $6,832 per crop acre and $82.71 per CSR point per tillable acre.
Some 'extreme' land sale prices leave people wondering
However, you do hear of some land selling for extreme prices. Recently, there was an instance of 80 acres auctioned for $13,000 an acre in Sioux County in northwest Iowa. It is high quality cropland. The bidding started at $7,500 and after 25 minutes of auction action and two recesses, only two bidders were left and it ended up selling for $13,000 per acre.
Iowa State University Extension economist Mike Duffy conducts an annual survey of land values statewide in Iowa. The results of this year's survey will be released December 15. "Our questionnaire has been sent out to realtors and others and we're now compiling the results of the surveys being returned to us," says Duffy. "The release date for the 2010 results is December 15."
Realtors have often reported sales in the $6,000 to $8,000 per acre range this fall for good land. But what's going on when farmland sells for $13,000 per acre, and it is not development land? "With that situation it was because two people who both wanted the same piece of land went head-to-head in the bidding," says Duffy. "That's part of what you do when you have an auction. As a seller, you try to see if you can get at least two people there to bid strongly for the farm."
Not as much land is being offered for sale this fall
"The other side of these higher prices for land is we aren't seeing the amount of land being offered for sale that we normally see. And we're seeing strong demand for land both from farmers and outside investors," he notes.
Is there reason to be concerned? Are land prices getting over-heated? Could they collapse? Is there any resemblance to what is happening with land prices now compared to what Iowa saw back in the late 1970s and early 1980s? "There's a lot of difference," says Duffy. "In the late 1970s and early 1980s farmers had more debt than they have today. That debt caught up with many who had borrowed heavily to buy high-priced land, and when crop and livestock prices sagged, it resulted in the mid-1980s farm financial crisis."
Also, there was more land being bought under contract with the seller providing financing back then--based on "sale for deed." That's another difference between now and the situation in the 1980s. "There are some similarities, such as the price of land running up to a high level. But there are differences," says Duffy.
Key factors to keep an eye on as indicator of future land prices
Duffy says there are two key factors to keep an eye on for clues as to what's ahead. One is the government's policy and programs on energy. The other factor is the government's interest rate policy. The federal ethanol tax credit is up for renewal. If Congress doesn't renew the 45 cent per gallon blenders tax credit and the 54 cent per gallon tariff on imported ethanol, both due to expire at the end of 2010, it would have an adverse impact on crop prices and land prices, he says.
Duffy adds, "We now have high corn prices. If you look back on when the federal energy legislation and the government's ethanol policy took effect with the Renewable Fuel Standard mandates, that's when we started seeing the run-up in corn prices, about July 2006. Then land values started upward more as farm income began rising. In 2009 the cost of crop production jumped up, and land values slowed down a little. But grain prices started moving up again in summer 2010 and land prices have risen in sympathy with crop prices. As farm income goes up, land values go up. And the cost of production goes up, which tends to temper the farm income increases."
Are farmers buying most of this land or are investors?
"This is a key issue," says Duffy. "Farmers are buying more of it—although there are investors bidding for land too. We are seeing a big expansion in the number of acres being farmed by individual farmers and farm families. They are trying to farm to make a living and we're seeing a lot of rented base. This is adding a lot of risk and a new dimension of risk we haven't seen before."
This risk is what many of these farmers are trying to overcome—by buying the land instead of renting it from a landlord, he adds. If they can buy the land, then they're going to have more control over it. Another factor is with the concentration of animal feeding operations, farmers need more control of the land as a place to apply the manure. That's another reason they want to own the land if they can—which is also giving more boost to farmer demand for land.
Don't take on more debt than you can handle, if buying land
Any red flags out there? "Farmers need to be careful about taking on too much debt," cautions Duffy. "Don't take on more debt than you can handle. You need to be cautious as income could suddenly drop back down. Oil prices are always a concern. Fertilizer prices are increasing. This fall in some areas it's difficult to get fertilizer at any price. Seed costs have jumped up the past couple years. Push the pencil and be careful what you're getting into. Remember, things are never as good or as bad as they seem. We need to be careful in that way."
Two bidders may want the same piece of property, notes Duffy. There's an expression, when do you buy the farm? A farmer may say "When it's for sale." A bidding war can get sentimental. For example, a family may have lost some land in the 1980s on a farm sale due to the financial crisis. Today, one of the people who once owned a chunk of it wants it back. So sentimentality can enter in.
Another old saying is "You only want to own what lays next to you. That is a truism. Look at how land prices have increased since grain prices began rising this past summer. It's not surprising to see these spikes in farmland sales. A farmer recently told Wallaces Farmer, "I bought ground in the 1980s for $1,600 and $1,800 an acre and I'm now going to balance that out with some land that's for sale nearby that's $6,000 to $7,000 per acre."
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