Farmland values have dropped across much of the Midwest this year, but not significantly. Should we expect them to go down even further, or are values anticipated to remain fairly stable? Read on to learn more about what’s propping up farmland values right now, buying trends, and three factors that might cause farmland values to decrease.
Slight Trickle Down Trend
Iowa State University performed a land value survey, and Iowa’s average farmland declined 0.8% in 2017-2018 to $7,264 per acre. They say that low commodity prices, higher interest rates and trade disputes are the significant contributing factors. On the surface that appears grim, but it’s important to keep it all in perspective. Values now are still 8% higher than in 2011, and 63% higher than in 2008.
Sara Schafer of AgWeb wrote an article just after Christmas titled, “2019 Farmland Outlook: Values Stay Resilient.” Her article provides additional opinions of farm real estate executives and experts that are seeing a “Slight trickle-down trend” in farm values. According to Erik Norland, the executive director and senior economist of CME Group, the price of agricultural land has skyrocketed- rising 169% between 1994 and 2015. Since 2015 though, farmland prices have flat-lined.
Despite the many things that should be driving farmland values down, they remain fairly stable. Why?
5 Factors Keeping Farmland Values Stable
Iowa State University researcher Wendong Zhang says there are 5 factors that are helping to keep Iowa farmland values stable.
- The farmland market is very tight. Not a lot of farmland is changing hands, and that’s been the trend for the last five years. Lower supply will boost prices.
- Zhang says that 82% of Iowa farmland is fully paid for. Even if the farm economy continues to decline, many will continue to hold onto their land because they own it outright or for sentimental reasons.
- High crop yields. This reduces production costs on a per-bushel basis. It also takes away some of the pressure on farm profits and land values.
- Interest rates are going up, but they’re still historically low. They’re well below pre-recession levels. Zhang says that from 2006-2014, farm real estate loans declined almost 300 basis points and have only risen 100 since 2014.
- The cost of production estimates. With ISU estimates for corn at $3.60 and soybeans at $9.46 per bushel, farmers will breakeven or have positive production margins. This bodes well for farm incomes and assets.
Analysts have noted a few trends. One being that more farmers are buying land than investors. According to the ISU survey, 72% of Iowa farmland sales were to existing farmers. Investors made up 21% of sales, and new farmers 5%.
Steve Bruere, the president of Peoples Company in Clive provides similar evidence that’s applicable to the entire Midwest.
“Farmers buy 80% of Midwest row-crop farmland, and they have lower return expectations than investors who are buying for purely economic reasons,” he says. “If you see that drop significantly and investor return expectations start to drive the market then you could see a significant change in land values due to the type of buyer.”
University of Illinois farm economist Todd Kuethe says that farmland buyers are typically in it for the long haul, and that’s why farmland values don’t always mirror drops in prices or farm incomes.
“People who are optimistic about farmland point to the long run,” Kuethe said. “They say if you buy farmland you’re going to hold it for 30 years, then they’re going to give it to somebody you’re related to and they’re going to hold it 30 years.”
Gap Between Land Quality Widens
Another farm value trend that’s becoming more apparent especially in Minnesota, is the gap between good and lower quality land. It’s widening. Mark Dorenkamp of Brownfield Ag News spoke with Kent Thiesse with MinnStar Bank. Thiesse says that quality farmland is holding its value, but lower quality land isn’t.
As profit margins get even tighter, farmers are paying closer attention to drainage and soil fertility. Even if they’re renting.
“We had about three pieces of prime farmland about a month ago that brought pretty top-dollar above $8,000 dollars an acre, which seems kind of high given where we’re at. But then about a week later we had some land that was floored at $6,000 and they didn’t have a bidder on it.”
What’s Ahead This Year
This mentality has the potential to put some pressure on farmland values. Jim Farrell, the president of Farmer’s National Company in Omaha says it’s tough to predict.
“My crystal ball is a bit foggy,” he says. “I think we will see a gradual decrease in land values in general over the next 12 months as interest rates continue to increase and cash flow needs at the farm level continue to become more of an issue for refinance.”
What Might Increase Farm Values?
Norland says there are three factors that might decrease farm values.
- Interest rates. Farmland values typically follow real interest rates and the value of production. Positive real rates could mean bad news for farmland values.
- A strong dollar could be bearish for crop prices.
- Crop prices. Higher prices for certain crops could help offset higher interest rates. Lower prices could make things worse.
With the trade war and the government shut down going on, it can be difficult to feel optimistic, especially about farmland values. But it’s important to remember how far we’ve come in the last 25 years. We’re in a slight trickle down trend after years of growth. Farmland values tend to be resilient, and don’t always follow drops in crop prices or drops in income. Let’s hope that if this correction continues, it remains slight.