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Steady State | Farmland Values Stabilize on Strong Demand, Limited Supply


At 85, Rudy Raths still has a sharp eye out for farmland. The Alexandria, MN, farmer owns about 3,000 acres of cropland in west-central Minnesota, which he farms with his son. He picked up a 240-acre parcel a while back, paying about $3,000/acre. “I’d buy more if it was available,” he says. “I’d sooner invest in land than anything else. It always seems to provide a return.” But, he adds, “There’s quite a bit of competition for good land when it comes up for sale.”

Willing buyers like Raths tell the story of cropland values in the past year. Strong demand and fewer tracts of land for sale stabilized land prices after dipping in late 2008 and early 2009. By 2010, prices for top-quality farmland were again on the rise.

“Economics 101 appears to be working,” says Lee Vermeer, vice president of real estate operations for Farmers National Company, Omaha, NE. “There’s strong demand, but not much supply, particularly for high-quality land.”

That equation has sustained prices and even produced a few “extraordinary sales,” Vermeer says. In a June 18 auction in Franklin County, IA, for example, two parcels of cropland fetched over $7,000/acre.

Nebraska, Kansas and the Dakotas led farmland markets in 2009, according to USDA’s annual land values and cash-rent survey, which reported land values as of Jan. 1, 2010. Northern Plains farmland values rose 7%, Delta farmland climbed 6% and Corn Belt values edged up 2%.

Farmland gains continued in the first half of 2010. In August, the Federal Reserve Bank of Kansas City reported that the price of irrigated land was 9% higher in Kansas and 6% higher in Nebraska than a year ago. Non-irrigated land in those states rose 6% year-over-year. “Particularly in central and south-central Nebraska,” Vermeer says, “we’ve seen really strong sales of good, irrigated ground in the last six to nine months, often in excess of $6,000/acre.”

The Iowa Farm and Land Chapter of the Realtors Land Institute estimated that Iowa land values ticked up 3% between September 2009 and March 2010, averaging $5,500 for high-quality land and $3,000-4,200 for low- and medium-quality land.

In Indiana, top-quality farmland increased about 6%, according to Purdue University’s 2010 Farmland Values and Cash Rent Survey. Values ranged from $3,500/acre for low-productivity land, to $5,310/acre for top-quality ground.

Likewise, the Federal Reserve Bank of Chicago in August reported a 6% year-over-year average increase in the value of farmland in the major corn-producing states of Iowa, Illinois and Indiana. “Location has been a major determinant for farmland values this year, even more significant than quality at times,” says Chicago Fed Business Economist David Oppedahl. “There are reports of prices boosted by bidding between farmers for desired parcels of farmland.”

Midwest land markets sizzled from 2005 to mid-2008, then cooled in late 2008, when crop margins tightened and the financial crisis deepened, says Royce Elker, director of appraisal services for AgStar, a Mankato, MN, Farm Credit Services bank.

Elker oversees about 2,000 farm real estate appraisals a year, tracking based on three-year land-value rolling averages. Gains held steady from 2001 to 2004, at about 8% a year, he says. In 2005, appreciation rates climbed into the double digits, peaking at 12.5% in 2008. “The upward trend continues,” Elker says, “but at a decreasing rate.” Three-year average appreciation dropped to 11% in 2009 and 7% in 2010, he says.

Underlying variability

Average gains mask a lot of variability, though, says John Moss, president of The Loranda Group, Bloomington, IL. “There’s a divergence. Farmers are paying premium prices for good land and discounting poorer pieces.” Prime farmland is up 5-8% this year, Moss says, while “lesser-quality tracts are steady to weaker.”

Brent Qualey, vice-president of Botsford & Qualey, West Fargo, ND, sees similar variability in Minnesota and the Dakotas.

Advanced crop genetics have boosted farmland values in North Dakota and the Midsouth, by providing “more options for crops and more consistent yields and returns, which has helped push up land values in those areas.”

By contrast, transitional land near cities is dropping in value, Elker says. No one is developing.

Active farmers expanding their operations are still the primary buyers of farmland. “Any time a good farm comes up for sale in an area, there are usually a number of neighboring farmers interested in adding it to their existing acreage,” Vermeer says.

The pool of potential buyers isn’t quite as deep as it was a few years ago, when every sale attracted dozens of bidders, Qualey says. Still, “there is an adequate number of willing buyers,” generally from the neighborhood, and many buyers are paying cash, he says.

Bob Swires of Swires Land & Management Co., Danville, IL, notes the same trend. Swires oversees an annual statewide land values survey for the Illinois Society of Professional Farm Managers and Rural Appraisers. Most Illinois farmland sales last year “were for cash,” he said, and “do not have recordable mortgages.”

More investors outside of agriculture are buying farmland, diversifying their portfolios and hedge against inflation. “Over the last 10 years,” Vermeer says, “land has been a much better investment compared to the stock market, it’s no contest.”

Historically, “An investment in farmland has provided a 3-4% annual rental return from operations or cash rent, plus a capital-gain increase” – and with less variability than competing stock-market investments, says Purdue University Economist Craig Dobbins.

There hasn’t been much farmland for sale in the past year, though. Lacking alternative investments, U.S. landowners have hung on to their farmland, Moss says. In fact, “in the last 15 years, this is the fewest number of ‘A’ and ‘B’ quality farms I’ve seen for sale.”

In Wisconsin, the number of farmland acres sold in 2009 slid 41% from 2008, the Wisconsin Department of Agriculture says. In northwest Illinois, just 5,900 acres of farmland changed hands in 2009, compared to 11,000 acres the year before, Swires reports. Vermeer estimates that Farmers National farmland listings shrank by one-third in 2009.

But he and others are seeing more land for sale this fall, as landowners rush to beat an anticipated capital-gains tax rate hike. The current rate expires at the end of the year, and 2011 rates might rise 30% or more, depending on what Congress does.

Vermeer predictsthat land markets will remain solid in the coming 12 months, supported by a limited supply of cropland for sale, the uncertain economic climate, a lack of stable alternative investments, and low interest rates. “Land has always been seen as a safe haven in times of uncertainty,” Vermeer says.

And if crop yields and commodity prices hold this fall, Moss adds, “Farmers will have money in their pockets. Invariably, when farmers have money, they buy land.” 

October 2010

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