Where Are Land Values Heading?
Another one of my loyal readers asked that question in early June. The land values in his area are influenced by the 1031 tax exchange and the government payments, without much pressure from development values or population.
Are land values in Iowa and the Upper Midwest ready to cap out like they did in 1981? Let’s examine this issue.
First, ethanol and alternative fuels are being capitalized into land values as much as 10-15%. Some early investors into ethanol have made a $10,000 investment that has yielded them a $15,000 return annually. Much of this profit creates a psychology to reinvest into land. My advice would be that the alternative energy profits are short run, perhaps one to three years. Take some profits, diversify the investments and build some working capital.
What could crash the land market?
1) Any reform in the 1031 exchanges.
2) A 200 basis point increase in long term interest rates.
3) A slowdown in the alternative fuel market and a flight to cash and liquidity by both the farm and non-farm public.
If an individual is about 50 years of age, such as the reader that posed the question, be prudent if you are profitable either from the farm or other businesses. Know your business, family and personal goals. Second, realize you are in the later stages of the land value increase cycle. Only with strong cash and working capital can you weather the value decline to position yourself to capitalize on the next upturn.
The Road Warrior of Agriculture
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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