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Corn+Soybean Digest

Farmland values, how high can they go?


After the crash in farmland values from record high prices in the 1980s, farmland values continue to rise and are once again reaching all time record levels.

At the end of each year a survey is conducted for farm land sales in 14 southwestern Minnesota counties. The survey reports bare farm land sales to non-related parties for the first six months each year. Data collected from the counties of Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine indicated prices increased from an average of $2,262 in 2005 to $3,702 in 2008 – an increase of 64%. A large portion of this increase (30 of 64%) happened in 2008. Farmland prices increased, in these 14 counties, from an overall average of $2,849 per acre in 2007 to an average of $3,702 in 2008.

Only one county experienced a decline in 2008 and that was Lincoln County with a negative 2.4% change while having the largest increase in 2007 of 47.8%. Land sold each year can vary by region even in a county so values can fluctuate. For example farmland could be sold one year closer to a larger city like Marshall and none is sold the next year.

So what is making land prices increase? Farm income, grain prices, interest rates, return on other investments and 1031 exchanges are often mentioned as reasons for the increase. Farm profits are up in 2008 to record levels according to USDA forecasts. This trend will probably continue. Record prices for corn and soybeans were recorded in 2008. This would add local demand for the land from farmers. Interest rates are at historically low levels with the current national recession and land rental income is comparable or larger than what an investor can earn from treasury bills or a certificate of deposit at financial institutions.

Money continues to leave the stock market and flow into more cash-based products. The 1031 exchange is for farmers or landowners who have land in an area of increased value due to location to city or development and rather then pay taxes on a large gain from the sale of the land they purchase like property or other farmland at a more reasonable price. This has the effect of increasing prices even in non metro locations, but this impact will be tempered by the national recession.

How high can farmland values go? Supply and demand will determine this. The simple return on investment, which is determined by rental rates, will determine how competitive farmland is compared to other investments and this will determine a value for farmland. If interest rates rise, or farm rental rates fall, the value of land is sure to be affected in a negative way. But as long as these factors do not occur, the price of farmland will continue to climb. There are indications that land values have started to decline 10-15% in the second half of 2008 as the stock market and grain price fell considerably.

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