Farmland prices depend on geography, proximity to urban areas, farm size, land quality and use, and other factors. In other words, they’re like pretty much everything in farming—highly individual. But overall, there are signs the farmland boom is cooling, at least for now.
Although a survey of values for the first quarter of 2015 is due soon from the Federal Reserve Bank of Kansas City, the agency’s previous report reveals this trend. Consider the following farmland price changes year-over-year for the fourth quarter of 2014, ranked from greatest value gains to greatest value declines:
- Oklahoma: 19%
- Texas: 9.8%
- Wyoming, Colorado, northern New Mexico: 3.9%
- Southern Wisconsin: 2%
- Kansas: 0.9%
- North Dakota: -0.8%
- Western Missouri: -1%
- South Dakota: -1.7%
- Northern Indiana: -2%
- Northern Illinois: -3%
- Nebraska: -3.4%
- Minnesota: -4.9%
- Iowa: -7%
Broken down by type of farmland—nonirrigated, irrigated and pasture or ranchland—the Kansas City report shows increases in the fourth quarter of 2014 ranged from zero (nonirrigated) to 10% (ranchland).
From the first quarter of 2011 through the third quarter of 2013, all three types of farmland gained over the previous year by double-digit rates in each quarter. The last reported negative number happened in the second half of 2009.
New Study Sheds Light On Prices. A new study of farmland prices published this week by Kansas State University agricultural economist Mykel Taylor is based on actual sales in the state reported by the Kansas Property Valuation Department. The report then compares those values with figures from USDA’s Kansas Ag Statistics Service survey.
Nonirrigated farmland in Kansas rose 6.2% from 2013 to 2014, while irrigated land rose 9%, according to the Kansas Property Valuation Data. Pasture saw the biggest gains at 10.2%, Taylor says. Prices were $2,990 for nonirrigated land; $5,195 for irrigated; and $1,802 for pasture.
Meanwhile, USDA’s survey of ag producers and landowners reports a similar trend or price pattern but with much lower values in some cases and lower growth rates. Taylor notes the difference might result from people not being up to date with the latest land values.
Even the timing of a farmland sale or survey affects the price, Taylor says.
“Sales in the fourth quarter tend to bring higher prices,” she points out.
Federal Reserve sources continue to say they don’t expect a crash like that of the 1980s, though capitalized land values (cash rent divided by the 10-year Treasury note rate) is now above farmland value, as it was in the early 1980s. That relationship suggests prices are too high relative to underlying returns and interest rates. Farmland returns already have fallen. If interest rates rise, it would add to pressure for farmland value to fall, according to Gary Schnitkey, University of Illinois.
A 3% interest rate would be about in line with current values, according to one Federal Reserve economist. A 4% interest rate likely would mean a 30% reduction in land value.
Source: Gary Schnitkey/University of Illinois
Another risk: If the supply of farmland for sale rises considerably, a strong drop in prices might occur. Two years ago, when commodity prices were high, the demand for land probably would have absorbed an increase in supply. Today, as profits narrow and investors turn their backs on commodities, it might take lower land prices to clear the market.
Rents Will Fall Later. Taylor’s analysis of rents and projections for 2015 also highlights factors that can make it even more difficult to draw conclusions. “You would expect the reduction in crop prices and profitability to influence both land purchases and rental rates,” she says. “But rents are lagging. One reason is they tend to be negotiated for multiple years, so they may not be renegotiated until the contract runs its course.”
The rent to value is falling, she notes. “Ten years ago, a return of 5 to 7% was common. That is down to 3.8% for nonirrigated land and 2.5% for irrigated. Ranchland is just 1.3%,” Taylor says. “Of course, alternative investments such as T-bills or bonds, which would compete for investments, also are very low.”
Using basis-adjusted futures prices from November the year before harvest, Taylor projects a 29% to 62% drop in rental rates for nonirrigated land in Kansas in 2015 and a 30% to 49% drop for irrigated land. “Do I think we’ll see that sharp a drop? No,” she says. Not only will some rents not be renegotiated, but data are based on averages and do not reflect land quality. Surveys also do not collect information on factors such as nonmarket activity that might be included in the relationship.