Farmland might lose its sizzle if drought continues
When having a conversation about farmland prices, the word "bubble" slips in right away. Many predicted in 2012 that farmland values would finally begin to decline, after almost two
decades of overall growth.
Instead, the historic increase in farmland values continued, according to USDA. Major crop-growing states such as Illinois, Indiana, Nebraska and Ohio surpassed the $5,000-per-acre threshold for average farm real estate value. The Dakotas, Nebraska and Kansas also posted large gains.
Mike Walsten, editor of LandOwner newsletter, part of the Farm Journal Media family, predicted that farmland prices would trend steady to 10% higher in 2012. "Instead, we saw a breathtaking upswing in prices during the last third of the year as the impact of record corn and soybean prices was felt across the Corn Belt."
The major driver behind the price explosion was the historic drought.
"It upset predictions and resulted in another year of strong net incomes for many producers," Walsten says.
2013 outlook. Steve Bruere, president of Peoples Company, a real estate brokerage in West Des Moines, Iowa, says the land market continues to be bullish. "We’ve seen a 50% rise in land values in the past couple years," he notes.
Supplies are tight for farmland but the big wild card for 2013 will be precipitation. "The weather will dictate what happens to land values. We’ll have the world’s largest crop planted in 2013. If we have timely rains, commodity prices will go south and that will negatively impact values. If we have another short crop, land values could continue their ride up," he says.
Walsten agrees. "Current drought patterns in the western Corn Belt have us wondering what 2013 crop yields and prices will bring," he adds.
As of now, Walsten predicts net farm income to remain positive for 2013, which usually means strong demand for farmland. Interest rates should remain low for the majority of 2013.
Supply, however, will be tight. "With the late-2012 tax-inspired selling now out of the way, offerings will mainly be limited to estate tax settlements," he says. Therefore, for 2013, Walsten predicts that land values will rise 10% to 15%. "That all could change with a turn in the weather."
A Profit Bubble
Agriculture is in a bubble—but not a farmland bubble, says Jim Knuth, senior vice president Farm Credit Services of America. "We are not in an asset bubble. We are in a profit bubble."
The major farmland value drivers in the past, he says, were:
- Strong demand for commodities, both domestic and export
- A low interest rate
- Exceptional net farm income for the crop sector
"We believe two of these three will change," Knuth says. "Net farm income will fall as production margins normalize and a supply response is realized. Also, interest rates are likely to eventually increase."
The good news is that land values today are supported by long-term demand factors. His advises farmers is to be realistic. "At today’s price levels, purchasing farm ground is a long-term investment decision."
You can e-mail Sara Schafer at email@example.com.