February 26, 2019
Many agricultural experts and economists have been warning for the past few years that we could be headed for a significant correction in farm land values in the Midwest. Land value summaries showed that a reduction in average land values did occur in some regions of the U.S from 2014-16, including the Upper Midwest. Land values in the Midwest stabilized somewhat in in 2017, before showing some signs of decline in many areas in 2018.
Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends for Midwest farm land sales. Iowa farm land values rose at an incredible pace from 2000 to 2013, with only one minor decline in 2009, before more significant declines of 8.9 percent in 2014, 3.9 percent in 2015, and 5.9 percent in 2016. This was the first time that the Iowa land value survey has shown three consecutive years of decline since the mid-1980s. The 2017 Iowa Farmland Value Survey showed an increase of 2 percent, or $143 per acre, compared to a year earlier, before a slight decline of 0.8 percent or ($62) per acre in 2018. Overall, 2018 average farm land values in Iowa are 16.6 percent below the 2013 peak average land value of $8,716 per acre.
The average 2018 land values increased in only two of the nine crop reporting districts in Iowa, as compared to 2017 average land values, while decreasing in five districts, and staying the same in two districts. The greatest increase was +3.8 percent in the south-central district, while the largest decline was 3.6 percent in the neighboring southeast district. The northwest district reported the highest 2018 average land values in Iowa at $9,311 per acre. There continues to be a limited supply of available land for sale in many areas of the state.
Trends in farmland values in southern Minnesota are probably fairly close to the trends shown in the Iowa land value survey, reflecting the lower crop prices and tighter profit margins in recent years. Similar to Iowa, land values in many portions of southern Minnesota seemed to stabilize in 2017, before declining in 2018. In addition to low profit margins, 2018 corn yields were the poorest in decades for many southern Minnesota farm operators, due to the excessive rainfall during the 2018 growing season. Some isolated land sales across southern Minnesota have still been reported at fairly high values per acre; however, the overall land value trend in the past 4-5 years has been a decline of 10-18 percent from the peak land values in 2013 and early 2014.
One of the best sources of farm real estate values in Minnesota is the University of Minnesota’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 site allows for selected sorts by county, state economic regions, watersheds, etc., as well as by types of land.
Based on potential returns from crop production, current land values should probably be much lower than current levels. In recent years, many farm operators have purchased farmland as an opportunity investment, using returns from existing farm land that is debt-free to help subsidize the cash flow and debt payment ability on the newly purchased farm land. Similarly, investors have purchased farmland as a long-term investment, realizing that current cash rental rates in most areas will lead to less than desirable annual rates of return at the present time.
Most economists point to the relative stability in farmland values in the Midwest as the primary reason that we have not seen more farm operations discontinuing due to financial collapse or bankruptcies. However, the continuing low profit margins in crop production, as well as in most of the livestock sectors, in the past couple of years is increasing the financial stress for many farm operations. The value of farmland accounts for over 80 percent of the total assets in the U.S. agriculture industry. During the farm financial crisis of the 1980s, average farmland values declined by over 60% in a 5-year period from 1981 to 1986, which lead to many farm bankruptcies and foreclosures.
Currently, there are no signs on the horizon of a dramatic decline in land values, similar to the mid-1980s. However, there are some lingering caution flags that could put further downward pressure on land values in the coming 12-18 months. These potential challenges include:
Continued low or negative profitability in crop and livestock farming.
Lack of new trade agreements, which would likely keep commodity prices reduced.
Rapid increases in interest rates by the Federal Reserve Bank.
Reduced interest by farm operators and investors to purchase farm land.
A large increase in the amount of land being offered for sale.
Lack of confidence in the land market by ag lenders.
Many areas of the Upper Midwest experienced above average corn and soybean yields in 2016 and 2017, which seemed to stabilize land values in many locations of the region in 2017 and early 2018. However, greatly reduced crop yields in many portions of southern Minnesota and northern Iowa in 2018, together with continued low commodity prices, appears to be putting more downward pressure on land values in some locations. Most likely, the future trends in crop prices, along with the level of 2019 crop yields and profitability in livestock production, will determine if land values continue to stabilize, or if we see further declines in land values later this year.
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