Commodity prices and outside investors have driven huge gains in farmland prices, but buying can still make sense.
Is it time to expand your operation by acquiring land?
"Yes, if you've got the money and if you can handle cash flow," said Joel Hertz, board chairman at Hertz Farm Management, Inc., based in Nevada, Iowa. "It's always time to buy."
Farmland provides a secure investment, but "You've got to understand the risks," he said at the Allendale Ag Leaders Outlook Conference Jan. 21.
Hertz speaks from experience. His company manages more than 2,000 farms and provides appraisal and real estate services to buyers and sellers in a region that stretches from Minnesota and Indiana to Colorado.
Farm prices have been climbing since 1986, when the crisis of the early 1980s was ending, and the gains exceeded 30% in some Corn Belt states last year.
The Federal Reserve Bank of Chicago reported farmland prices in its district as of Oct. 1 had gained 7% in three months and 25% in one year.
An Iowa State University survey of real estate brokers and others who know land values showed the average value of the state's farmland had gained 32.5% last year to $6,708. Iowa State cited rising farm income as the primary factor.
Buoyed by Farm Income
Hertz also put higher net income for grain farmers at the top of his list of forces driving land prices. Farm revenue soared as yields trended higher and crop prices climbed.
Even though input costs also rose, net farm income surged. In five of the past seven years, U.S. net farm income has beat the 10-year average of $64.8 billion, and the USDA forecast for 2011 is a record-high $101 billion.
Strong farm balance sheets also pushed land prices up. National average debt-to-equity ratios ran as high as 30% in the mid-1980s, but now they're down to about 10%, said Hertz.
Biofuels, low interest rates, government payments, and the limited amount of high-quality land offered for sale have added to the price gains, said Hertz.
"You'll see more auctions," he said. "Why? People don't know what their farm is worth. It's a moving market."
Aging Farmers and Estate Sales
The aging farm population will be an important factor in land availability in coming years. Forty-four percent of current landowner are older than 70 years and 48% of farm acreage is owned by individuals 70 years or older.
Iowa State University reported that 42% of Iowa farmers plan to retire in the next five years, and 44% of those who plan to retire have not identified a successor.
"Most sales today are estate sales," said Hertz. "The kids want to divide up the money."
Investors Buying Too
Farm operators are buying 70% to 80% of land that sells, and most of the remaining farmland goes to investors.
Hertz said his company has been selling a lot of leasebacks and helps owners get a satisfactory return.
"The investor buys it. The farmer farms it," said Hertz. "That's a change in attitude. We didn't used to have farmers out there looking for investors."
Although he sees strong buyer interest, Hertz said, "It's a time for caution. Profit margins will tighten in 2012, unless corn explodes.
"When land comes up for sale, you have to have your income and expense ready. Your financial records and [knowing] what you can do give you the courage to buy."
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