After a setback in 2009, the value of quality farmland has steadily marched higher. The majority of the momentum stems from $5 corn and $13 soybeans. Federal Reserve Banks in Kansas City, Chicago and Minneapolis report land values consistently rose 8% to 10% on an annual basis through the third quarter of 2010.
The annual land values survey conducted by Iowa State University confirms the trend. It found that an average acre of Iowa farmland jumped 16% on an annual basis to $5,064 per acre—up $693 from 2009. Top-quality Iowa farmland surged nearly $800 an acre to an average of $6,109 per acre.
Land auctions at the end of 2010 frequently sold quality land for $7,000 to $9,000 per acre in Illinois and Iowa. Several highly productive tracts in Yankton, S.D., sold for more than $6,000 per acre. In Indiana, high-quality land often topped $5,000 per acre.
Other high-dollar land auctions around the county included:
- 120 acres in Story County, Iowa, sold Nov. 30 for $8,100 per acre
- 272 acres in Emmet County, Iowa, sold Dec. 15 for $7,600 per acre
- 80 acres in Warren County, Ill., sold Dec. 1 for $8,525 per acre
- 120 acres in Vermilion County, Ill., sold Dec. 8 for $7,956 per acre
- 298 acres in Fountain County, Ind., sold Nov. 30 for $5,525 per acre
- 66 acres in Clinton County, Ind., sold Dec. 1 for $9,152 per acre
- 72 acres in Saunders County, Neb., sold Dec. 6 for $7,125 per acre.
- 160 acres in Jackson County, Minn., sold Nov. 30 for $6,875 per acre
The primary driver behind the run-up in land values is the combination of limited offerings and rising farm incomes. The majority of buyers are expansion-minded farmers, although investor interest was quite strong in the last half of 2009 and through 2010. Investors are attracted to farmland ownership due to the lack of attractive investment alternatives. The prospect of a 4% to 5% annual cash return before capital appreciation certainly turns their head compared with a 1% return on certificates of deposit.
Quality matters. The wave of demand is selective. Buyers want high-quality ground. While the value of poorer-quality farmland has risen due to the updraft from the demand for quality land, demand for poorer-quality farmland is soft. In addition, demand for recreational land (for hunting or a country home) remains weak.
High-quality farmland is demanding a premium. In a twice-annual survey of Iowa farmland conducted by that state’s Realtors Land Institute, the premium paid for high-quality versus low-quality farmland rose to 79% in September 2010. The trend is for the premium to continue to widen, which indicates that overall land values have not reached a peak.
The run-up in farmland values has grabbed the attention of bank regulators and the Federal Reserve.
Sheila Bair, chair of the Federal Deposit Insurance Corporation, is concerned about a farmland bubble. “U.S. farmland values remain some 58% above their 2000 levels in inflation-adjusted terms,” she says. “Strong agricultural conditions have spurred renewed interest in farmland on the part of investors. But today’s positive fundamentals are subject to change.
A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation’s 1,579 farm banks. While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring.”
So far, the debt structure of agri-culture does not suggest a farmland bubble. The main indicator is the level of debt versus equity and debt versus assets held by the nation’s farmers. USDA projected the nation’s debt-to-equity ratio would slip to 12.6% by the end of 2010—down from 14% in 2009 and well below the 22% level that existed in 1981 when the farm-debt crisis began.
The future. The key going forward is farm income and interest rates. If farm income drops and/or interest rates rise, some of these favorable financial indicators could slip into the danger category, causing the demand for high-quality farmland to cool.
But for the near term, farm income prospects look favorable, especially for grain producers. The Federal Reserve continues to talk about keeping interest rates low in order to spur economic growth. This suggests demand for high-quality farmland will remain strong for several more months.