Average gains mask a lot of variability, though, says John Moss, president of The Loranda Group, Bloomington, IL. “There’s a divergence. Farmers are paying premium prices for good land and discounting poorer pieces.” Prime farmland is up 5-8% this year, Moss says, while “lesser-quality tracts are steady to weaker.”

Brent Qualey, vice-president of Botsford & Qualey, West Fargo, ND, sees similar variability in Minnesota and the Dakotas.

Advanced crop genetics have boosted farmland values in North Dakota and the Midsouth, by providing “more options for crops and more consistent yields and returns, which has helped push up land values in those areas.”

By contrast, transitional land near cities is dropping in value, Elker says. No one is developing.

Active farmers expanding their operations are still the primary buyers of farmland. “Any time a good farm comes up for sale in an area, there are usually a number of neighboring farmers interested in adding it to their existing acreage,” Vermeer says.

The pool of potential buyers isn’t quite as deep as it was a few years ago, when every sale attracted dozens of bidders, Qualey says. Still, “there is an adequate number of willing buyers,” generally from the neighborhood, and many buyers are paying cash, he says.

Bob Swires of Swires Land & Management Co., Danville, IL, notes the same trend. Swires oversees an annual statewide land values survey for the Illinois Society of Professional Farm Managers and Rural Appraisers. Most Illinois farmland sales last year “were for cash,” he said, and “do not have recordable mortgages.”

More investors outside of agriculture are buying farmland, diversifying their portfolios and hedge against inflation. “Over the last 10 years,” Vermeer says, “land has been a much better investment compared to the stock market, it’s no contest.”

Historically, “An investment in farmland has provided a 3-4% annual rental return from operations or cash rent, plus a capital-gain increase” – and with less variability than competing stock-market investments, says Purdue University Economist Craig Dobbins.

There hasn’t been much farmland for sale in the past year, though. Lacking alternative investments, U.S. landowners have hung on to their farmland, Moss says. In fact, “in the last 15 years, this is the fewest number of ‘A’ and ‘B’ quality farms I’ve seen for sale.”

In Wisconsin, the number of farmland acres sold in 2009 slid 41% from 2008, the Wisconsin Department of Agriculture says. In northwest Illinois, just 5,900 acres of farmland changed hands in 2009, compared to 11,000 acres the year before, Swires reports. Vermeer estimates that Farmers National farmland listings shrank by one-third in 2009.

But he and others are seeing more land for sale this fall, as landowners rush to beat an anticipated capital-gains tax rate hike. The current rate expires at the end of the year, and 2011 rates might rise 30% or more, depending on what Congress does.

Vermeer predictsthat land markets will remain solid in the coming 12 months, supported by a limited supply of cropland for sale, the uncertain economic climate, a lack of stable alternative investments, and low interest rates. “Land has always been seen as a safe haven in times of uncertainty,” Vermeer says.

And if crop yields and commodity prices hold this fall, Moss adds, “Farmers will have money in their pockets. Invariably, when farmers have money, they buy land.” 

October 2010