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Duffy: Crop prices spur rise in farmland value


February 24, 2013
Messenger News

AMES -Iowa farmland values continue to rise, and questions are looming as to how much longer this trend will last.

Mike Duffy, Iowa State University economics professor and extension farm management economist, said the primary reason for the rise in farmland values is the rise in prices producers are receiving for their crops.

"Farmers made more money than they have, and higher incomes are translated into higher land costs and rents," said Duffy.

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-Messenger/Farm News file photo
Iowa's average cropland value increased to $7,300 per acre, up 23.7 percent from 2011. Farm real estate value in Iowa averaged $7,000 per acre in 2012, up 22.8 percent from 2011. The average farm real estate value of farmland and buildings increased to $175 billion in 2011, a 26.3 percent increase from 2010.

According to information provided by Duffy in a press release, as farm income increases, so will land values. In 2005, corn prices averaged $1.94 per bushel in Iowa and the preliminary estimate for prices for November 2012 was $6.80. Soybean prices changed from $5.54 to $13.70 over the same period.

But besides commodity prices and an increase in farm income, Duffy said there are other causes for the increase in farmland values. including that interest rates are at the lowest in recent memory.

According to the release, farmland purchased by investors went from 18 percent in 1989 to 39 percent of purchases in 2005, but investor purchases are back to the 1989 level of 18 percent this year after decreasing for the third year in a row.

"Land is a unique commodity," said Duffy. "Farmers are the primary purchasers, and they primarily buy land to own it, not to sell it."

Duffy said the recent Rural Life Poll indicated 65 percent of the farmers agreed or strongly agreed with the statement that land was overpriced, but about the same percentage agree with the statement that land was a good investment.

How long will this trend continue?

"Land prices will remain high as long as commodity prices remain high, yields are adequate and non-land costs don't increase too much," said Duffy. "I think over the next few years, corn is likely to settle back to $4.50 or so and land values will adjust accordingly."

Should those paying high land prices be concerned that history is repeating itself and they are putting themselves at risk?

Duffy said the last big boom was in the 1970s, and the bust started in 1981 through 1986. During that time, land values dropped 67 percent from $2,147 to $787 an acre.

There was also a boom in land prices in the 1910-1920 period, followed by the bust from 1921 to 1935.

"In the 1970s, there was a lot of money borrowed," he said. "The net income was not increasing, and there was a lot of land sold on contract; we don't have that today."

There has been some speculation that farmers and investors with "old money" and those with deeper pockets are the only ones that can make farmland purchases and that leaves the average farmer and young farmers unable to compete in the farmland buying market.

Duffy said not all of the financial support buyers have has been handed down, and everyone needs to farm within their means.

"It has always been hard to start farming," said Duffy. "There was even a theory called the 'land tenure ladder' developed in the 1920s."

This theory, Duffy said was that it was a process towards ownership - you didn't start out by owning land.

"People need to be patient and farm based on the resources they have available. If that means they have to pass up buying a piece of ground for now, then so be it," said Duffy. "That is better than going broke.

"Unfortunately, some people think like the song that says, 'We want it all and we want it now.' Similarly I saw a church bulletin board that said, 'Lord grant me patience- now.'"

Paul Sickler, farm manager and real estate broker from Farmers National Co. serving counties in northwest Iowa, Minnesota and South Dakota, reiterated much of what Duffy believes.

Sioux County, where the record land sale was last year, is one of the counties Sickler serves.

That particular farm, Sickler said, happened to be a very good 80-acre parcel in a strong area of Northeast Sioux County.

As he understands, a neighboring farmer was interested and purchased the land for $21,900.

The main reasons Sickler sees farmers buying land at this time includes production agriculture being very profitable for the past three years; many buyers have the money available to purchase land; and that rates remain historically low and very high commodity prices.

Sickler added that the prospects look favorable for production agriculture to remain strong into the future.

Ray Frye, owner of Frye Farm Management in Webster City, said farmland values in the six-county area he manages around Webster City have also been on the rise and much like Duffy and Sickler, said low interest rates and high commodity prices are responsible.

"It's a function of low interest rates, horrible investment rates outside of farm ground and higher grain prices," said Frye.

Frye has been managing farms for 35 years. He said a high quality piece of ground, with good drainage and a crop soil report of 75 or better could bring upwards of $11,000 to $12,000 in his managing area.

"The price ranges and a lot will depend on location," he said.

As far as who specifically is buying the land at such high prices, Sickler said there are a few possibilities.

"As far as investors, there is a lack of alternative investments that provide much of a return on investment, as compared to buying land," said Sickler. "Recently, there has been land come up for sale, and this may be the only time in that farmer's lifetime that particular parcel of land comes up for sale."

Frye echoed Sickler, saying that buyers are farmers with sizable operations who have the opportunity to buy a piece of land that connects to theirs as well as some investor purchases, and farmers that may have an emotional tie to the ground as well.

Frye said although there has been a lot of talk about the farmland market crashing, he doesn't see that happening.

"There has been a lot of concern, but not right away," said Frye. "It could drop 20 percent or so someday, but not seeing a huge crash happening."

Should the rise in land values be considered a speculative bubble?

"Some are concerned that land prices are getting too high and that this may be a speculative bubble," said Sickler. "I guess time will tell in regards to that, but it does make it harder for younger/beginning farmers to purchase land."

"I don't think we are on a speculative bubble," said Duffy. "I think land values will correct as we see commodity prices get back to a more 'normal' level, but that will be like a tire with a nail, not a bubble."



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