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Land Prices Start to Simmer

November 16, 2011
By: Ed Clark, Top Producer Business and Issues Editor
Land prices start to simmer 2

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Market watchers see steady to single-digit growth in the year ahead

Land prices intensified to a rolling boil during the past few months, but market analysts expect the heat to die down to a simmer in the coming year.

"Farmland values won’t jump up quite as fast in 2012," says Howard Halderman, president of Halderman Farm Management Service, Wabash, Ind. He expects strong commodity prices to push land prices upward by another 5% to 10%.

Randy Hertz, vice president of Hertz Farm Management, Nevada, Iowa, predicts the 2012 land market will stay firm to flat. He notes that land prices still aren’t quite equal to the present value of corn and soybeans. Land today in Iowa is equal to $5 corn and $11 soybeans.

In Iowa, farmland values increased 32.6% from September 2010 to September 2011, according to a survey conducted by the Iowa Realtors Land Institute. That’s the largest increase or decrease since the survey was created in 1978.

Don McCabe, manager of Soy Capital Ag Services, Kankakee, Ill., saw high-quality Illinois farmland climb to $10,000 per acre in 2011. While that level makes most farmers’ teeth chatter, the largest percentage increase in Illinois farmland values came in 1977, when values rose 37.3%. Since 2004, Illinois farmland values have increased by an average of 10.8% annually.

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It’s no secret that profitability is driving farmer interest in acquiring more land. Low interest rates are helping too. Halderman estimates that producers have purchased 75% of the farmland sold in his market area of Michigan, Ohio, Indiana and Illinois in recent months.

In Illinois, McCabe figures that half of farmland buyers in 2011 are actual farmers. He says another third are investment groups and regional investors, which includes some hedge funds.

Low returns on investments such as Treasury bills, certificates of deposit and the stock market have been the main factors stimulating investor interest in farmland. Unlike commercial real estate, farmland is attractive as an investment because it has a zero vacancy rate. McCabe adds that increasing cash rents for farmland are yet another reason for strong investor interest.

Reality Check. Land that brings top-drawer prices—such as the 120 acres in northwest Iowa that sold for $16,700 per acre in October—grabs headlines but doesn’t reflect the averages. The Iowa land value survey shows the state’s farmland averaged $6,000 per acre in 2011.

The land value bubble everyone likes to talk about might be overstated too, says Murray Wise of Murray Wise Associates, Champaign, Ill. "I don’t see land values going down, but 3% to 5% might be a large increase [in 2012] and the market might be flat," he says.

A September survey of Pro Farmer members found that 24% expect a 10% or greater increase in farmland values in 2012; 45% anticipate values to increase less than 10%; and 26% think values will remain unchanged. Half of respondents said they are actively seeking land.

"The strong rise in values is primarily a corn thing," says Mike Walsten, editor of the LandOwner newsletter. He says the big farmland value increases have been on corn ground in the heart of the Corn Belt and in some wheat areas. Farmland values declined in 2011 in parts of the South, Northeast and West.

Walsten doesn’t see investment and hedge funds gobbling up land. "Funds are getting knocked out of the bidding. It’s hard for funds to invest $100 million, 80 acres at a time," he says. Funds want at least a 5% return, while farmers are often comfortable with something lower because they benefit in other ways from adding ground to their existing operations.

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FEATURED IN: Top Producer - Mid-November 2011
RELATED TOPICS: Land, Economy, Top Producer

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