Would you pay $5,073 for an acre of prime Iowa farmland? That was the average November Scott County figure reported by Iowa State's annual survey of land appraisers, farm realtors and related professionals. Farmland values topped $4,000 in seven Iowa counties; the state average was $3,204. This is the fourth year of record-high Iowa farmland values.

The November 2005-06 average values topped a previous record of $2,914 last year, 10% above the previous statewide average. It's the first time Iowa's average farmland value exceeded $3,000. One river county average — Scott County — was $5,073, the highest ever recorded in the survey's 20-year history, says Mike Duffy, Iowa State University Extension economist. His annual survey of farm lenders, appraisers, realtors and related experts tally their valuations of Iowa farmland.

The Iowa survey mirrors what's happening across the western Corn Belt. It's some of the newest data available (November '06) and is less influenced by proximity to metro area land speculators that shadow Illinois and Indiana farmland markets. Since Iowa's the epicenter of the ethanol boom, it also reflects the biofuel's new role in driving farmland values. Some say ethanol will supplant government payments as a primary force in shaping land values.

“Frothy” is how longtime farmland economist Philip Raup characterizes today's farmland market. He studied Minnesota farmland price trends from 1953 to 1993 as University of Minnesota ag economics professor. “It's ephemeral; the ‘Next Big Thing,’” he adds. “Here today and gone tomorrow. That is likely to get people in trouble.”

In Nebraska, “All of a sudden land prices last fall hit us like a tsunami as ethanol profits hit land prices,” says Bruce Johnson, University of Nebraska-Lincoln ag economist. “We are coming off three years of 10% annual increases in eastern Nebraska. Our corn ground might be looking at an average 10% increase in values this year. Rents may increase by 10-20%. It has happened so rapidly.”

The ethanol bug now affecting Corn Belt land prices shares some qualities of the 1970s land boom, “although it's not quite on that scale,” Raup says. After that export-driven boom, there were some pretty spectacular price drops of 50-60% from the peak. Today's run-up is no joke, and it begins to assume aspects of a dangerous bubble, drawing lines between regions that benefit and others that don't. I wonder what some cattle feeders think about having competitors for their corn feed.”

Higher crop prices and demand for biofuels were cited by 55% of the Iowa survey respondents in accounting for the surge in land prices. This replaced low interest rates as the leading driver of land prices in 2003, Duffy says.

Two things stand out in this year's survey, he adds: “The record levels of Iowa farmland prices. Even low quality ground is valued above $2,000. This is the first time that medium quality ground has topped $3,000.

“Scott County land rose above $5,000 — not only is that pretty good ground, but it also has some urban pressure from the Quad Cities and it's on the river,” Duffy says. “What's changed is that the interior counties (i.e., further from the river) carry less of a discount than in past years. This is ethanol demand at work.”

The ethanol boom has wrought annual farmland value increases of 8-10%, Duffy and Raup report.

The shelf life of ethanol plants may turn out to be short, Raup says. “It's picked up an anticipatory hope in farm communities where we've overproduced corn for some time now. Look at the long run, return on farmland investment has been 3-4% per year net over the past 50 years,” he says.

Well over 25% of Iowa survey respondents are concerned that the market is too high for profitable farm production, Duffy says. Maybe that's because 45% of Iowa farmland owners don't farm. Of those non-farm landowners, 19% don't even live in Iowa.

The good news is that about 75% of Iowa's farmland is owned without debt. This would indicate the potential for significant land value declines is less than it was in the early 1980s, Duffy says.

Iowa land prices have increased by 57% in the past five years, and 270% over the last 19 years. Today's Iowa farmland values roughly equal prices there in 1973 when adjusted for inflation and the value of the dollar. That was before the run-up in values that led to the peak of $2,147/acre in 1981. Five years later, values there had tumbled to a low of $787 before slowly rebounding.

Government farm payments were the primary factor that helped prices rebound at that time, Duffy says. Today they account for roughly half of an acre's value in farm country. “Over the past few years, investor demand has replaced government payments as accounting for the increases in land values,” Duffy says.

“In the 20 years that I've conducted this survey, this is the highest level of uncertainty about where prices are headed and for how long,” he adds.

As a result, the price risk of owning farmland is not diminishing, says Farmland Investor Newsletter's Mike Fritz.

Besides ethanol, non-farm investors have added a lot of spark to national farmland values. Farmland property values have climbed at double-digit rates for the past two years, attracting interest among non-farm investors.

USDA January '06 data shows farmland values rose 15% in 2005, and 21% in 2004. The average value of cropland was $2,390/acre last year, up from $2,110. The 2006 USDA Land Values and Cash Rents Summary credits the increases to low interest rates, strong demand for farmland for commercial and houses and investor interest.

Regional markets have their own flavor. For example, Illinois and Indiana farmland values are moved by the demand for recreational land within several hours' drive from Chicago and Indianapolis, says Fritz. Also, land on the periphery of metropolitan areas gets bid up by developers.

You might expect the Iowa market to be less vulnerable to these forces. Yet investors have been an increasing role compared to existing and new farmers over the past three to five years, Duffy says. For the first time in four years, this year's ISU land survey finally showed an increase in farmers buying farmland compared to the number of non-farm investors.

The last boom in land values taught farmers to expand through leasing rather than owning. That's been helped by a land market where cash rents have shrunk as a percentage of land values, despite a boom in underlying values. “The wave of capital that flooded the farmland sector pushed cropland prices up 13% last year, while 2006 cash rents inched up just 1.3%,” Fritz says.

In Iowa, “cash rents of $225 would not surprise me,” Duffy says. “Since this whole market has taken off since last October, we will be watching rents catch up with corn prices.” Over the last decade, Iowa cash rents have represented about 33% of gross income (including government payments and crop insurance proceeds) on leased corn ground. Duffy expects this relationship to hold as corn prices rise.

Others disagree. “We have squeezed the margin in the rental market as far as we can, so ethanol demand may not immediately influence rents that much,” says Purdue University land economist Craig Dobbins.

What will put a lid on farmland prices? “Profitability,” Duffy says. Oil prices could drop, slowing down ethanol, corn and farmland prices. Or input prices could rise. If the economy slows, then recreational demand for land will cool.

“If present trends continue, we will see more cash rents, more out-of-state owners, and a large chunk of Iowa land pass from one generation to another. About 25% of our land is owned by folks above age 75,” Duffy says.

“A considerable amount of Iowa's farmland will change ownership over the next decade,” he adds. “Most of this land will stay within families rather than going on the open market.”

The ISU survey raises as many questions as it answers, Duffy concludes. “How will the livestock sector react to the higher prices and the availability of alternative feeds? What does it mean to have corn prices tied to the price of oil? What are the impacts of these prices on beginning farmers?”

Land is a highly emotional subject, unlike other commodities, says Raup, reflecting on 40 years of Minnesota farmland price data. “Not many people migrated to America for oil, but our ancestors moved for the promise of land.”

Editor's note: Iowa Extension Service offers a home study course to help people value land at www.econ.iastate.edu/faculty/duffy/.

A Boom Like The '70s?

Iowa's double-digit percentage increases of the past three years remind some of us of the 1970s when land values increased rapidly, only to crash in the 1980s. There are several important differences to keep in mind when pondering those similarities, says Mike Duffy, Iowa State University Extension economist. For 20 years, Duffy has surveyed land appraisers, lenders and other farmland value experts for the annual Iowa State University Land Valuation Survey.

“Iowa land values increased more than 30%/year for 1973, 1974 and 1975, but the current increases in values are nowhere near that level,” Duffy says. “The boom in the values in the early 1970s followed a period of relative stability in Iowa land values. Today's increases come at a time when Iowa land values have increased fairly steadily over the past several years.

“Since 2000, Iowa land values have increased $1,347/acre on average, or a 73% increase. This is a substantial increase, to be sure, but it is nowhere near the over 125% increase in values from 1972 to 1975,” Duffy says. “There are other differences such as the level of inflation, the fact that more land is held without debt and is held by older people.”

Values increased in all 99 Iowa counties and topped $1,400 an acre in every county for the first time since ISU began the survey in 1941.