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Corn+Soybean Digest

North Dakota Cropland Values Show Another Strong Year

A recent survey indicates that North Dakota cropland values continued their run higher, but at a lesser rate than the previous year.

"The increase was about 16% (from January 2008 to January 2009), compared with a 20% increase the previous year," says Andrew Swenson, North Dakota State University Extension Service farm management specialist. "The latest increase puts the average cropland values at around $925/acre, compared with$800 the previous year."

Swenson bases his calculations on surveys conducted in January by the North Dakota Agricultural Statistics Service.

"These are historic times for land values," Swenson says. "During the past six years, land values have had an average annual increase of more than 12%. There have been only two periods during the past 100 years that have had longer periods of continuous, strong increases in land values. There was an eight-year period (1942 through 1949) with an average annual increase of 10% and a nine-year period (1973 through1981) that averaged a whopping 18% annual increase."

However, the strong run-up in values may not continue.

"This winter, at meetings throughout North Dakota, I stated that the luster of land was dimming and values will tend to flatten during 2009," Swenson says. "A key factor is the projected profitability of future crop production. It was very strong during much of 2008, but the outlook for 2009 is not as optimistic because of a drop in crop prices. However, it is too early to predict that land values will decline."

Several positive factors remain. Many crop producers in the state have had two outstanding years and therefore have the financial wherewithal to bid on land. Interest rates to finance land purchases are attractive, while returns and confidence on alternative investments are weak.

All the above factors hinge, in some form, on the world economy and weather, which are not easy to predict.

"Last year I wrote that some unforeseen circumstances, such as a contraction in the global economy or significant worldwide increases in production, would have to occur before there would be a halt to the strong upward momentum in land values," Swenson says. "Both those events were realized during the last half of 2008."

The timing may be opportune for those who have a desire or need to sell their land. Prices are at historic highs, the land rent-to-land value ratio is historically low and capital gains tax rates are attractive.

"The main consideration against selling is how to better use the funds," Swenson says. "The return and perceived safety of other investments may not be satisfactory. Another reason is they don't make land anymore, but the world population increases by 70-75 million/year."

The largest increase in cropland values was in the east-central region at more than 30%, to $961/acre, followed by increases around 18% in the southeastern part of the state at $1,362, the north-central region at $753 and the southern Red River Valley at $1,992. The northern Red Valley region was up 13% to $1,482/acre. Increases in the northwest, southwest and south-central regions ranged from 5% to 8% at $473, $562 and $678, respectively.

The southeastern and east-central regions have led the charge in land values the past six years with an average annual increase of nearly 17%.

"Land rents tend to be stickier than land values and are slower to move up and slower to move down," Swenson says. "For example, during the past six years when cropland values increased by an average annual rate of 16%, rents increased by 5%. During the last land crash, from the 1981-1982 peak to the 1987-1988 trough, the total drop in cropland values was about 40%, but land rents only declined 15%."

The increase in cropland rents (January 2008 to January 2009) was 7%. This is down from the prior year's increase of 10%, but is very strong in historical terms. The rate of increase in per acre cropland rents were the highest in the southern Red River Valley. The increase was 17% to $85.50. The east-central region was up 10% to $46.10. Rents increased 5-7% in the northeastern, southeastern, north-central, north Red River Valley and south-central regions to $42.20, $63.20, $39.80, $62.60 and $34.90, respectively.

Rents increased 1-2% in the southwestern and northwestern regions to $29.90 and $30.60, respectively.

"I believe most of the increase in cropland rents were from renewals of multiyear contracts where landlords wanted to catch up on recent trends and one-year contract activity during the first part of 2008," Swenson says. "Given the drop in crop prices and profit outlook for 2009 that occurred during the last third of 2008, most annual contracts renewed at the end of 2008 were probably flat."

Swenson cautions that the values and rents are averages for large multi-county regions. Prices can vary considerably within a region.

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