Most reports from private companies involved in selling agriculture farmland in the Midwest have indicated strong land values in recent months. In many areas, 2010 land values are being reported near or above the peak land values in mid-2008, after declining 3-5% late in 2008 and early in 2009 in many locations. The decline in land values early in 2009 in some areas was expected due to reductions in farm income, lower crop prices, rising crop input costs and lower profitability in the livestock sector. By the fourth quarter of 2009, farmland values had already begun recovering from the temporary softening of land prices earlier in the year. Land sales in most areas of the Midwest during the first half of 2010 seem to indicate that farmland values have not only stabilized, but have again begun to increase; however, land values in more intense livestock production areas have been much slower to increase in recent months.

The rapid rise in land values from 2006 to mid-2008 was driven by record grain prices and record farm profitability, especially in primary producing corn and soybean producing areas, such as the Midwest. By comparison in 2010, grain prices are at much more moderate levels, and projection for farm profit levels from corn and soybean production are at much tighter margins in 2010 than they were in 2007 and 2008. One factor that seems to be driving the current spike in farmland values seems to be the fact that there is a much more limited supply of tillable farmland being offered for sale, compared to 2007 and 2008. Another factor in the strong land prices may be some renewed interest from outside investors, as an alternative to other investments.

According to most farm real estate experts, there is a big difference in land quality with regards to current trends in farmland values in south-central Minnesota. It is not unusual to hear land sales of $5,000+/acre for farmland with top quality soils and good to excellent tile drainage. However, poorer quality land in the same area, with lighter, more sandy-type soils, or with medium to poor tile drainage, may only be selling for only $4,000-4,500/acre, or less. The recent rise in farmland prices seems to have been confined to the better quality, well-drained farmland, while the poorer quality farmland has remained closer to mid-2009 land values. By comparison, the rise in land values in 2007 and early-2008 was more general for all types and quality of farmland.

Trends In Land Values
Iowa State University does a land value survey each December, which is usually quite revealing on trends in farmland sales. In December 2009, the average value per acre of Iowa farmland was listed at $4,371/acre, a decrease of $97/acre, or 2.2%, from December 2008. This was the first annual decrease in average Iowa farmland values in 10 years, since 1999, and was the first time since 2004 that annual average land values in Iowa had not increased by a double-digit annual percentage increase from one year to the next. The slowdown in average Iowa farmland values in not surprising, considering that average annual land values had nearly doubled from 2003 to 2008, and increased by nearly 40% from 2006 to 2008. Another interesting piece of information from the 2009 Iowa land survey was that 72% of the reported land sales in 2009 were to existing farmers, 23% of sales to investors, 4% to new farmers and 2% to others. Nearly two-thirds of the respondents in the Iowa survey reported fewer land sales in 2009 than were reported in 2008.

Each summer USDA releases their annual estimate of farmland values, as of Jan. 1 that year. The most recent USDA report showed that that average cropland value in the U.S. was $2,700/acre, as of Jan. 1, 2010, which was an increase of 1.1% from a year earlier. Interestingly, the region of the country with the largest percentage increase in cropland values at +6.9% was the Northern Plains states, which includes North and South Dakota, Nebraska and Kansas. The average cropland value in Minnesota, as of Jan. 1, 2010, was reported at $2,770/acre, which was 6.1% higher than a year earlier. Average cropland value in Iowa for 2010 was listed at $4,100/acre, an increase of 1.2% compared to 2009.

What About Future Land Values?
There are plenty of reasons to be optimistic about continued strength in future farm real estate values, especially for the long-term. The ever-increasing demand for renewable energy should strengthen the demand for farmland, and should help strengthen long-term grain prices. Also, the U.S. economy should start to rebound in the coming years, which should increase investor interest in land, and more farmland will continue to be removed from production for urban development purposes.

On the flip side, there are also reasons to be more pessimistic about the future values for tillable farmland. The long-term prospects for corn and soybean prices beyond 2010-2011 appear to be more questionable than current price levels, crop input costs are likely to continue to increase and profit margins in corn and soybean production are likely to remain quite tight in the next few years. These economic challenges in the ag sector, combined with increasing crop production costs, have caused farm operators to become much more conservative on land purchases, compared to 2007 and 2008. There is also some concern that the current U.S. economic policies may lead to sharp increases in inflation, and higher long-term real estate interest rates in the future, which could soften demand for farmland.

In the next 12-18 months, we are likely to see some continued strength in farmland values in areas where farm profitability has remained strong. However, overall land values could moderate by the end of that 12-18-month period, especially if the overall U.S. economy continues to struggle in 2011. One factor that could lead to further enhancement of land values in the short-term would be a significant increase in grain prices, beyond the expected levels for late 2010 and early 2011.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.