After climbing by double digits for the previous three years, U.S. farmland values fell 4% last year. It's the first drop since 1987, the USDA reported in August.

In the Corn Belt, average cropland value fell by $160/acre to $3,870/acre, according to the Agriculture Department's annual survey, which reported land values as of Jan. 1, 2009. Values in the Northern Plains and the Delta rose slightly.

Midwest land values continued to soften in the first half of 2009. In August, the Federal Reserve Bank of Chicago reported that the price of good-quality cropland in several leading farm states was 3% lower on July 1 than it was a year earlier. Farmland values in Iowa and Michigan lost 5%; Illinois and Wisconsin fell 2%. Indiana values were up slightly from a year ago.

“It's not really a surprise,” says David Oppedahl, Chicago Fed business economist. “We've seen such rapid increases in the last three or four years; the stage was set for some consolidation in land values.”

The hot farmland market — which had appreciated nearly 80% from January 2004 to January 2008 — started cooling off late last year. “Until November, it was going gangbusters,” says Sam Kain, area sales manager for Farmers National Company, Omaha, NE. Kain handles land sales in Iowa, Missouri, Minnesota and the Dakotas. In Iowa, for example, “we sold over 240 properties in 2008. Then the financial crisis hit, and things came to a screeching halt.”

Crop prices tumbled while input costs jumped, dimming farm income prospects for 2009 and 2010. That put the brakes on farmers' push to buy land, Oppedahl says. Deep slumps in the hog and dairy sectors drained livestock producers' equity. Flagging ethanol and biodiesel demand further dampened farmers' appetite for land. Meanwhile, the recession dried up investor demand for recreational properties and housing development on the outskirts of cities, contributing to land value decreases.

Still, Oppedahl notes, “We're not talking about the 15%, 20%, 30% declines that we're seeing in urban housing values.”

University of Nebraska economist Bruce Johnson describes the change as “a modest value recalibration.” And high-quality farmland is holding its own, Kain says, although medium- to lower-quality farms have lost value.

IF THERE'S ONE word that characterizes farmland markets now, it's “variable,” say Farm Belt land experts.

“In all my years in the business I've never seen land values so varied and localized,” says Brent Qualey, vice president of Botsford & Qualey Land Company, West Fargo, ND. A 28-year industry veteran, Qualey does land deals in North Dakota, South Dakota and Minnesota. “Each area has a different story. You'd think there would be a general trend,” but sales have been all over the board, he says.

In April, for example, Botsford & Qualey handled an 80-acre sale in northeastern South Dakota that “blew the top off the market,” Qualey says, fetching $5,000/acre in an area that had never seen bids above $3,800/acre. On the flip side, a sale in North Dakota's Red River Valley that same month brought about 10% less than similar ground in the area last October, he says.

John Moss, president of The Loranda Group, Bloomington, IL, is also seeing sharp regional differences. His company brokers land in Illinois, Indiana, Iowa, Missouri and Wisconsin. He describes the current ag land markets as “a series of micro markets. Some are 20% below last year, some are about the same and some are a bit higher, even.” He's been in the business for over 25 years, but he can't recall another period when “the market was moving several different directions at the same time.”

Clouding the picture even more are the folks waiting on the sidelines to see what shakes out, Moss says. “Individuals, trusts, estates or retiring farmers who may have been interested in selling in a normal year are holding on to land because there's so much uncertainty in the markets.” And with financial assets looking riskier than ever, “they don't know what to do with the sale proceeds.”

Moss also saw quite a few land auctions that didn't close last fall and this spring because bids “didn't reach expectations — so the sellers just didn't sell the land.”

Strong farmland markets have several common features, Moss and Qualey say: financially secure farmers sitting on cash reserves; a history of good crop yields; and pent-up demand due to a limited supply of land available for sale. Weaker markets often have had erratic weather or poor crop yields, they say.

Active farmers are still the main farmland buyers, as they have been for the last several years. But growers “are being more selective than a year ago,” Moss says. “A lot of farmers are saying no to lower-quality land.”

More outside investors are again buying farmland, Moss and other land agents report. With the turmoil in financial markets, “they see land as a safer and more stable place to put money,” says Kain, of Farmers National. “Overall, land has competed very well with stock market returns in the long term.”

Although land values “may have hit a plateau,” Kain expects them “to start creeping up again and to remain strong. If there is a limited supply of a product on the market and a strong demand for that product, prices will increase over time.”

But others anticipate a pullback from last year's peak. In the 2009 mid-year land values survey by the Illinois Society of Professional Farm Managers and Rural Appraisers, released in July, half the respondents thought farmland prices would decline over the next 12 months; one-third expected stable prices. Changes in federal tax policy and higher capital gains taxes could weigh on land values, too, says Kent Thiesse, vice president of MinnStar Bank, Lake Crystal, MN.

On the other hand, low interest rates and fears of inflation could buoy land prices, says Craig Dobbins, Purdue University economist. “Many people look at farmland as a good hedge against inflation.”

And as the global recession eases, Dobbins says, there are good reasons to expect worldwide food demand to climb along with the world population.

Beyond that, Qualey says, productive farmland has the lasting appeal of a “tangible asset,” one you can pick up in your hands. “As the old-timers say, land is always going to be worth something.”

CASH RENT GAINS SLOW

Despite a drop in farmland values, farm cash rents continue to go up. After double-digit increases last year, farm cash rents rose more modestly in 2009.

Nationally, the cost of renting cropland rose 5.3% from 2008 to 2009, according to the USDA's annual land values and cash rent survey, released in August. Rents were up the most in the Northern Plains states, increasing 7.6% from last year. In the major corn-growing states of Illinois, Indiana and Iowa, rental rates moved up between 4.3% and 5.9%. These increases follow a double-digit jump from 2007 to 2008, when rent rose 13% nationally, and surged up to 18% in the Corn Belt and Northern Plains.

In Illinois, the timing of 2009 rental contracts affected rate increases, says Bob Swires, who heads up the Land Values and Lease Trends Project for the Illinois Society of Professional Farm Managers and Rural Appraisers. Rental rates negotiated in early 2009, after grain prices dropped, rose more modestly than rents set in early fall, 2008, he says. In Iowa, there are no signs of softening cash rent rates, says Sam Kain, area sales manager for Farmers National Company, Omaha, NE. “Overall, we have not seen a retreat in rents,” he says. “In 2010, I don't look for a big upward trend, but no lowering trend, either.”

Brent Qualey, vice president of Botsford & Qualey Land Company, West Fargo, ND, watches cropland rental rates in the Dakotas and Minnesota. “Rents are very strong here,” he says. “If land is available for rent, there's a long list of potential tenants.” He doesn't look for rental rates to decline in 2010. “Farmers have a lot of idle capacity in machinery that they want to put to work, so there's great demand for rented land.”

But crop price volatility and uncertain profit margins call for caution, says Craig Dobbins, Purdue University economist. “Part of it will depend on input prices, especially fertilizer prices. Whether you are making land purchases or bidding for cash rent, you need to budget and see where it fits into your business. This is a time to study carefully.”

The USDA National Agricultural Statistics Service publishes farm cash rental rates by county and by region. Go to http://quickstats.nass.usda.gov/, select “Economics” from the Sector menu and “Rent” from the Commodity menu, then choose report parameters.