Adjustment will last for five years
The days of sky-high farmland values are behind us—at least for now. Cautious buyers and lower net farm incomes are causing land values to flatten or decline, says Mike Walsten, editor of LandOwner newsletter.
“We’re in the second year of a five-year correction in land values,” Walsten notes. “During that total time, I see land values going down 20% to 30%.” Declines in commodity prices and net farm income are the main reasons farmland values are softening, Walsten explains. Yet land supplies are relatively tight, which will soften the decline.
“Not a lot of land is being sold,” Walsten says. “We used to annually turn over 3% to 4% of a county’s acreage base. It’s around 1% now.”
The market will stay tepid unless some type of crop problem causes corn prices to shoot up. “If you put the profits back in corn, you’ll have land values go up,” he says.
Investors Eye Land. In 2005, farmers accounted for 55% of Iowa farmland buyers, while investors purchased 40%, points out Ron Beach, director of land investment programs with Peoples Company based in Des Moines, Iowa.
“Through aggressive farmer bidding, the farmer-investor deal ratio now stands at 80:15,” Beach says.
Yet with net farm income declining, especially for grain producers, he thinks the tide is turning.
“Farmers are becoming more cautious, as are their lenders,” he notes. “Meanwhile, investor interest remains high, and dollars allocated are in the billions.” Investor interest and demand for farmland is at levels higher than Beach has ever seen. “During the past five years, longtime investors have been joined by a wide range of investment funds, partnerships, real estate investment trusts, family offices and high net worth individuals,” he explains.
Although Beach thinks investor purchases will increase, he doesn’t expect a buying frenzy. Overall, farmland must deliver a consistent and strong return for investors to pull the trigger.
Positive Outlook. Regardless of current economic changes, Walsten doesn’t think the decline in land values will resemble the crash of the 1980s. “My long-term outlook for farmland is positive,” he notes.
Farm balance sheets are strong, and fewer farmers are highly leveraged. “Farmers have had more time to prepare for the tighter cash flows. With interest rates creeping up and net farm income going down, it is a manageable correction,” he says.
Location and Quality Drive Prices
Farmland prices have leveled off or declined in most areas during the past year. Yet high-quality acres remain in high demand, according to the latest 17-state survey from Farmers National Company, the nation’s largest farm and ranch real estate company. The map on this page reflects average sale prices recorded in January for several regions.
A lower supply of land for sale plus continued demand has kept prices largely stable for high-quality acres, says Randy Dickhut, vice president of real estate operations, Farmers National Company.
“While lower-grade land has seen drops in value near 15% from recent highs, top-quality crop and grazing lands still bring solid prices as owner-operators and investors seek to expand their operations with the most productive land,” he says. “Land is viewed as a long-term asset.”