The answer as to whether land values have reached their peak probably depends who you ask. Some ag lenders and university land economists have suggested that land values may have peaked for the time being, due to expected reduced farm income, lower crop prices, rising crop input costs and lower profitability in the livestock sector. Other farmland real estate experts, primarily individuals involved in real estate sales, have suggested that land values in 2009 have already recovered from some softening of land prices late in 2008. However, it should be noted that many of the most optimistic viewpoints relative to short-term land values came before the recent drop in corn and soybean prices.
What Do Farm Owners Think About Land Prices?
A survey of ag landowners conducted earlier in 2009, found that only 30% of those surveyed thought land values have reached a short-term peak. Most of the remaining respondents felt that land value increases in the next few years will be much more modest than they were from 2006 to 2008. Another interesting item from the survey indicated that nearly three-fourths of those surveyed would consider buying farmland in the next few years, if the land price and circumstances are right. So, there appears to still be some good demand for land by interested buyers, with the caveat of conditions being right.
In the fourth quarter of 2008, land values stabilized – and even dropped slightly in some areas – after grain prices dropped dramatically from earlier in 2008. A survey of actual land sales in Iowa showed that land values dropped approximately 7.6% from September 2008 to March 2009. Some of the strength in land sales that was reported by land real estate brokers in spring 2009 was probably a reaction to some very strong grain prices from April to early June. However, from mid-June to early July, corn and soybean prices dropped sharply, which could lead to some further softening in short-term land values. In addition, the continuing profitability and economic struggles for livestock producers limits their ability to make land purchases.
Mixed Trends In Land Values
USDA reported a decrease in U.S. farm real estate values of 3.2% from Jan. 1, 2008, to Jan. 1, 2009, which was the first time since Jan. 1, 1987, that the annual USDA farm real estate value has decreased. The average value of tillable cropland listed by USDA on Jan. 1, 2009 was $2,650/acre, which compares to $2,760/acre in 2008 and $1,750/acre as recently as 2004. USDA reported the average cropland value in Minnesota on Jan. 1, 2009, at $2,610/acre, compared to $2,700/acre in 2008 and $1,920/acre in 2005. Nearly all upper Midwest and Plains states had land value decreases of 2-4% on Jan. 1, 2009, compared to 2008 land values, according to the USDA data.
Iowa State University does a land value survey each December. In December 2008, the average value per acre of Iowa farmland was reported at $4,468, an increase of $560/acre, or 14.3%, from December 2007. The average Iowa land value of $3,908 in December 2007 was $704 above the $3,204/acre in December 2006, which was a one-year increase of 22%. Iowa farmland values increased for nine straight years from December 2000 to December 2008, and had annual increases of 10% or more each year from December 2004 to December 2008. The $4,468 average Iowa farmland value in December 2008 represented about a 70% increase above the Iowa average farmland value of $2,629/acre in December 2004.
Regionally, one of the best sources of farm real estate values is the University of Minnesota’s Land Economics Web site. This site accesses a database of various land values, based on farmland valuations reported by county assessors offices throughout the state each year, which are adjusted annually based on actual land sales in a given county. This Web site allows for sorts by county, state economic regions, watersheds, etc.
What Does The Future Hold For 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 after 2009, which should increase investor interest in land, and more farmland will continue to be removed from production for urban development purposes.
On the flipside, there are also reasons to be more pessimistic about the future values for tillable farmland, especially in the short term. The prospects for corn and soybean prices in 2009 and 2010 appear much weaker than a few months ago, due to increasing supplies, coupled with economic challenges being faced by the livestock industry and renewable energy industry. 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. Another negative factor on future land values could be potential federal government changes in tax policy relative to 1031 land exchanges and capital gains taxes.
In the short term, we are likely to see some continued strength in farmland values in areas where farm profitability has remained strong. However, overall land values are likely to moderate a bit in the next six to 12 months, unless there is a sudden increase in grain prices during that period.
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.