Recent declines in grain and oilseed prices and the strengthening U.S. dollar might start to put a damper on escalating farmland prices.
Growth in farmland values slowing but still hot
Land values, particularly for cropland in the Corn Belt and Northern Plains, soared again in 2013. But analysts warn that current growth rates are not sustainable given the recent declines in grain prices and the strengthening U.S. dollar.
According to USDA’s Land Values report released Aug. 2, U.S. farm real estate value, a measure of the value of all land and buildings on farms, averaged $2,900 per acre in 2013, up 9.4% from 2012 values. Regional changes ranged from a 23.1% increase in the Northern Plains region to flat in the Southeast. Not surprisingly, the highest farm real estate values of $6,400 per acre were in the Corn Belt. The Mountain region had the lowest farm real estate value of $1,020 per acre.
"The past few months, the growth rate has been coming down," says Ernie Goss, MacAllister chair in regional economics at Creighton University in Omaha, Neb. "Softer corn and soybean prices, the stronger dollar and slower economic growth globally are all combining to put a dent in the growth in farmland values."
Long-term average farmland values will continue to grow about 7% to 8% a year
Still, Goss anticipates that long-term average farmland values will continue to grow at about 7% to 8% a year.
"Rising interest rates could also take a little air out of the land-price bubble," Goss says. "Growth rates of 15% to 23% are not sustainable."
Yet even if land values were to fall, he says, the country would not see a repeat of the 1980s farm crisis because farmland is nowhere near as highly leveraged today.
The average value of U.S. cropland, according to the report, increased $460 per acre (13% from 2012 levels) to $4,000 per acre. Year-over-year cropland values in the Northern Plains and Corn Belt rose 25% and 16.1% to $2,950 and $6,980 per acre, respectively. In the Southeast, cropland value fell 2.8% to $3,410.
The highest valued cropland was in New Jersey at $12,800 per acre, up 4.1%, followed by California at $10,190 and Colorado at $9,000. Iowa and Illinois values were close behind at $8,600 and $7,900.
Iowa farmland values have risen by double digits each year since 2010 when the value of cropland was $5,064, according to the Iowa State University land value survey.
"Where does this leave us? Many people have discussed the possibility that land is on a speculative bubble and that land values are going to collapse. No one knows for sure. But there are several key variables to watch to formulate an opinion," says Michael Duffy, Iowa State University Extension economist.
"One variable to watch is income. Theory tells us it would be the net income per acre that is the key, but analysis shows that the total income is a better predictor. In Iowa, there is a 95% correlation between land values and the value of agricultural production in the state. There is an 89% correlation between land values and net farm income," Duffy says.
According to USDA’s recent report, cropland values fell in four states (Florida, South Carolina, New Mexico and New York) and held steady in seven others.
The average value of U.S. pastureland increased to $1,200 per acre, up 4.3% from 2012 levels. Southeast pastureland fell 1.5% below year-earlier levels to $3,380, while pastureland in the Northern Plains soared more than 18% to $816.
"The attraction of farm life is increasing, so there is a high motivation to return to the farm, but buying a farm operation is not easy," Goss explains.
As today’s landowners die, leaving the farm to their heirs, the heirs are often unable to buy out their siblings or cousins. Thus, farms will continue to get larger and larger, Goss adds.
- September 2013