Land Prices Ignite

01:46AM Apr 30, 2011

High Commodity Prices Fuel the Fire in Land Values

The skyrocket ride in corn and soybean prices launched this past fall has had an explosive impact on the value of quality cropland across the Corn Belt.

The first barrage was felt in Sioux County, Iowa, in fall 2010 when a highly coveted 80 acres sold for $13,950 an acre. News of the sale spread through farm country like wildfire and left most shaking their heads in dis-belief. While shocking and not repeated (as far as we know), that sale did foreshadow strong bids that rang up at farmland auctions to follow:

  • 61.25 acres located 8 miles northwest of Normal in McLean County, Ill., auctioned by Soy Capital Ag Services of Bloomington, Ill., sold for $9,200 an acre in mid-November.
  • 120 acres just north of McCallsburg, Story County, Iowa, auctioned by Hertz Real Estate Services, Nevada, Iowa, brought $8,100 an acre at the end of November.
  • 80 acres west of Roseville in Warren County, Ill., auctioned by Van Adkisson Auction Service LLC, also in Roseville, brought $8,525 an acre the first of December.
  • 272 acres northwest of Armstrong in Emmet County, Iowa, auctioned by The ACRE Co., Spencer, Iowa, brought $7,600 an acre in mid-December.
  • 240 acres southeast of Jackson in Jackson County, Minn., sold by private treaty by Vacura Real Estate, Jackson, Minn., for $7,771 per tillable acre at the end of February.
  • 241 acres east of Greentown in Howard County, Ind., auctioned by Halderman Real Estate Services, Wabash, Ind., brought $7,500 and $6,855 an acre at the end of February.
  • 161 acres northeast of Holdrege in Phelps County, Neb., auctioned by Farmers National Company, Omaha, Neb., sold for $6,000 an acre in March.
  • 83 acres near Adrian in Hancock County, Ill., auctioned by Van Adkisson Auction Service LLC, Roseville, Ill., brought $11,000 an acre in March.

The survey says.

Private and land-grant university surveys confirm the explosion in land values. The semiannual survey of farmland values conducted by the Iowa Farm and Land Chapter of the Realtors Land Institute reported that the value of Iowa cropland surged 19.7% during the six-month period ending March 1. Adding that rise to the 5.7% increase that was collected in the September survey results in a total annual increase of 25.4%.

A private survey conducted by the Illinois Society of Professional Farm Managers and Rural Appraisers found that the value of excellent and good-quality farmland rose 4% to 22% across northern and central Illinois and 10% to 33% across southern Illinois.

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Preliminary results from the annual survey of farmland values conducted by the University of Nebraska–Lincoln indicate a gain of 22% in the value of Nebraska farmland. The annual survey of farmland values conducted by Iowa State University indicates that an average acre of Iowa cropland rose 15.9% as of Nov. 1—just prior to the surge in values that occurred during the past winter auction season.

Banker surveys also confirm the gains in the central Corn Belt. The Federal Reserve Bank of Chicago reported an increase of 10% across its district—the second highest annual increase that has occurred in 30 years. Leading the charge was an 18% increase in the value of Iowa cropland, followed by increases of 12% in Indiana, 11% in Illinois, 7% in Wisconsin and 4% in Michigan.

The Federal Reserve Bank of Minneapolis reported similar findings, with increases of 15% to 17% in the value of nonirrigated and irrigated cropland in the district. North Dakota reported the strongest gains: up 23.7% on an annual basis for dryland cropland and up 22% for irrigated cropland. Minnesota joined in with gains of 19.3% for nonirrigated cropland and 22.8% for irrigated cropland. South Dakota reported increases of 9.8% for the state’s nonirrigated cropland and 13.5% for irrigated cropland.

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The Federal Reserve Bank of Kansas City reported an increase of 12% to 15% in the value of nonirrigated and irrigated cropland. Leading the rise were the corn-producing states of Kansas and Nebraska, up 19.5% and 17.6%, respectively, in the value of nonirrigated cropland. Oklahoma reported a more modest annual gain of 5%.

The rise in values also prompted increases in cash rents, especially on those leases that were negotiated at the end of 2010 and in early 2011.

The Minneapolis Federal Reserve indicated that rents rose 10.4% from a year earlier for nonirrigated cropland as of the end of December. The Kansas City Federal Reserve Bank’s survey found a 6% rise in the value of cash rents as of year-end.

As an indication of the competitiveness for crop acres this year, the winning bid for a two-year cash lease for 700 acres owned by the Bloomington-Normal Airport Authority was $444.50 per acre, reports the Pantagraph in Bloomington, Ill. A late March Iowa auction, featuring 190 acres in Mitchell County and held by Farmers National Company, brought $490 an acre.

Looking ahead.

Net farm income is forecast by USDA to rise nearly 20% this year compared with 2010, to nearly $95 billion.That is the second-highest inflation-adjusted value in the past 35 years. In addition, the top five earning years for agriculture in the past 30-year period have occurred since 2004. With that much earning power in agriculture’s engine, economists feel reasonably confident that the demand for quality cropland will remain strong for the next one to two years. Strong demand for land also means steadily higher cash rents.

While the outlook is positive for land values, a study by the Federal Reserve Bank of Kansas City provides a sobering reality check for anyone contemplating a highly leveraged land purchase. The bank’s research suggests farmland values could decline as much as 33% if long-term interest rates
return to historically normal levels. Farm operators can prepare by keeping working capital high, leverage low and basing purchasing decisions on realistic cash flow projections rather than collateral values.