Farmland values return to more stable levels
For the past decade, farmland values have been onward and upward. That tempo started to dawdle in late spring 2013 in Illinois, Iowa and southeastern Minnesota due to wet weather and late planting, says Mike Walsten, editor of LandOwner newsletter, part of the Farm Journal Media family.
"However, demand firmed as conditions improved and crop prospects swelled versus a year earlier," he adds.
While crop potential improved in Illinois, the opposite was taking place in Iowa. A large number of prevented planting acres coupled with drought conditions shackled demand prospects.
"‘No sales’ were common at farm auctions in July, August and September," Walsten says. "Prices at Iowa auctions are down 25% to 30%, as a result."
Land-buying restraint lingered into harvest as farmers became concerned about shrinking profit margins in the not-so-distant future, driven by grain prices. USDA projects net farm income will decline by 27% in 2014.
"While still well above the 10-year average, that contraction in projected income naturally dampens buying enthusiasm," Walsten says.
Not all states are experiencing the decline in values. Walsten says Indiana, Ohio, southwestern Minnesota and South Dakota continue to see higher land sales due to strong crop yields.
"In those areas, there is plenty of cash available to purchase quality land," he says. "In addition, those areas have high livestock numbers, and farmers need farmland for feed supplies and manure disposal to expand."
Buy wisely. Several signs point to a long stretch of softer land values.
"I see farmland values declining 10% to 15% this year with another 10% to 15% possible in 2015," Walsten says.
With this level of uncertainty, Craig Dobbins, Purdue University Extension agricultural economist, says farmers need to carefully assess any land purchases. Farmland is historically a steady-return, low-risk investment, but now might not be a good time to buy.
"If the purchase fits in well with the farm business plan and there are sufficient cash reserves to withstand a downturn for the next two to three years, then go ahead," he says. "But if it in any way threatens the farm business, then I would want to be very, very cautious about making this purchase."
While prices might dip, Walsten says he’s not expecting a 1980s-style collapse, which took land values down as much as 60% across the Corn Belt. Both farmers and lenders have practiced restraint during this run up in prices, he says.
Farmers have decreased their leverage for fixed-rate loans, which won’t be subject to rising interest rates. "Additionally, farmers have been paying off their land loans; 75% of Iowa farmland is owned debt-free—the highest on record," Walsten says.
SOURCE: FEDERAL RESERVE BANK OF CHICAGO, FEDERAL RESERVE BANK OF ST. LOUIS, FEDERAL RESERVE BANK OF KANSAS CITY