You almost get sticker shock when you hear about some of today’s skyrocketing farmland prices. Right now, demand for U.S. farmland has jumped to a five-year high, according to Farmers National Co.
“While demand rose sharply during the last quarter of 2010, the supply of available farmland fell to historically low levels,” says Lee Vermeer, vice president of real estate operations at Farmers National.
While some residential and commercial real-estate values have been falling, that’s certainly not the case for farm real estate. “Instead, we’ve seen some high prices for farmland in recent months, even exceeding $10,000/acre in extreme cases,” says Purdue Economist Mike Boehlje.
I particularly like the fact that Boehlje claims these higher land prices aren’t for development purposes; they’re for farming. “Many of the land sales in the Midwest are to farmers rather than outside investors, so it’s farmers bidding against farmers,” he says.
Two big growth markets driving higher land prices, Purdue reports, are corn for ethanol and soybean exports to China. Get this: In 2005 those two markets required 16 million acres of production. By 2010 it took a whopping 41 million acres of the two crops to meet those market demands.
Of course with higher land prices you’re paying correspondingly higher rental rates – or so you thought. Last year an Indiana farmland value survey conducted by Purdue showed that average land was worth $4,419/acre in mid-June. Cash rents on that land averaged $161/acre, meaning buyers were willing to pay a price for land that was about 27 times the annual rent. By contrast, this “value-to-rent multiple” was only 20 in 2000 and just 12 in 1986.
As of Nov. 1, 2010, Iowa’s average farmland value was $5,064/acre, based on the Iowa State University land value survey. That’s an increase of 16% compared to a year earlier and 93% since 2004. The highest farmland values were in northwest Iowa, with an average land value of $6,356/acre.
Given the current level of grain prices, continued low interest rates and high demand for farmland, the strong land prices are likely to continue in 2011, says Kent Thiesse, vice president of MinnStar Bank, Lake Crystal, MN, and weekly columnist at www.cornandsoybeandigest.com.
Of course, there’s always risk in owning high-priced land. So ask yourself:
Still, the saying goes: “Put your money in land. God only made so much of it.”
February 2011