Farmers love a good rumor. So, the locals in my adopted home state of Iowa got pretty excited when the rumor mill put farmland in Sioux County selling for nearly $14,000 per acre. You should have seen the boys wind up when the rumor turned out to be true. An 80-acre tract of premium ground sold for $13,950 per acre at auction, according to Beyer Auction & Realty, Sioux Center. The bidding started at $7,500 an acre and rose in $100 increments. Two bidders, who happened to be neighboring farmers, carried the contest upward from the $12,000 mark.
One of my farmer friends has classified land as "too hot to touch." In most areas, current values are at all-time highs. The price tag for an average acre of Iowa farmland jumped 16% on an annual basis in 2010 to $5,064 per acre, according to Iowa State University’s recent land value survey. High-quality farmland is demanding premiums of several thousands of dollars more.
Iowa is not an anomaly. Federal Reserve Banks in Kansas City, Chicago and Minneapolis report land values consistently rose 8% to 10% this past year. The trend is for the premium to continue to widen. Read what leading ag economists have to say in "Red Hot Land".
The Bubble. Some experts maintain that farmland is the best alternative investment available and don’t see an end soon. Others warn the market is a bubble ready to burst. Perhaps the answer is somewhere in the middle.
John Moss, owner of The Loranda Group Inc., an ag real estate firm based in Bloomington, Ill., says historical evidence shows that at some point, the steep uptrend in farmland prices must moderate.
"Very few investments have sustained long term the returns land has produced in recent years," Moss says. "I’m not saying the land market is going to come crashing down, but let’s be realistic; at some point there will be a cooling off period."
Moss notes the factors driving land prices are well documented: higher commodity prices, poor returns on alternative investments and the desire to own a "hard asset" within the food chain. Grain prices will ultimately determine if this bull market in land can be sustained, he adds.
Hopefully, farmers can keep a cool head in this hot market. So far, the debt structure of agriculture looks promising. USDA estimates the farm debt-to-equity ratio dropped to 12.6% in 2010—down from 14% in 2009 and well below the 22% level in 1981 when the farm-debt crisis began.
Every buyer—whether farmer or investor—has their own motivations and financial realities. Forget the rumors. Managing land in this market requires trading on facts and avoiding the temptation to over-leverage your purchases.
- February 2011