Bullish Land Price Outlook
Ag Land Prices Remain Strong on High Demand, Rising Farm Income
There are many good reasons Chad Ratermann says he'll buy farmland, but the one that's always in the back of his mind has nothing to do with soil quality or field location. He's thinking about how to best give the family's next generation a leg up.
"I started thinking about that before I even had kids," says the dad of two. "I always wanted to make sure they had an opportunity to farm if they wanted it. Every morning I wake up planning on passing it down."
Ratermann, in his mid-40s, has a son and a daughter. His dad died when he was just 24, leaving him and his brothers, Darin and Craig, to grow up fast, taking what their dad left them as a start. From there, the brothers put a lot of hard work and determination into building Ratermann Brothers' Grain and Livestock, based at Bartelso, Illinois.
The diversified operation includes corn, soybean and wheat production, as well as hog finishing and cattle feeding businesses.
The three brothers are always looking for a chance to add good acreage to the mix, and in March 2021, they bought two tracts, totaling about 156 acres. The parcels were offered as part of a near-900-acre auction of farmland across Montgomery and St. Clair counties, through Indiana-based Schrader Real Estate and Auction Company. The average price for those tracts was $8,256 per acre, reflective of current prices in the area.
Ratermann liked the tracts because of their location and that they included good road frontage on two sides. The area is about an hour's drive from the base operation, but Ratermann says they are willing to look outside their immediate area when adding ground because heavy livestock use at their home base of operation drives land prices to the higher side.
"Overall, I'm looking for the right location, good soil types and I'm considering the way the land lays. Every area is different in terms of productivity, and I base price off of that," he says. Ratermann notes he looks for cropland that will give him corn yields of 185 to 200 bushels per acre (bpa), soybean yields of 60 to 75 bpa and wheat yields of 75 to 90 bpa.
Does Ratermann think land prices are too high? He says it's hard to put a number on where the land market should be or what makes sense. Even with higher commodity prices today, he doesn't believe most cropland actually cash-flows. But Ratermann says this isn't the only consideration when it comes to owning land.
"It's true that when we started buying land for the operation it was considerably cheaper, but so were commodity prices and yields," he points out. "I believe land is always a good investment, even with the ups and downs, especially if you're looking to hold it long term. That's the kind of buyer I am, long term. I'm looking not just to my future, but the future of the family for generations to come."
Ratermann's story is not a new one to R.D. Schrader, head of Schrader Real Estate and Auction. He says even as land prices went north of the $10,000-per-acre mark, a majority of the buyers he saw, and continues to see, planned to farm the land and pass it on to future generations. Farmland is not as much of an investment sometimes as a means of building on a chosen way of life.
Looking at this year's market, Schrader says he's seeing near-record prices in some areas. He believes this reflects pent-up demand from the past five to six years, when volume of available land for sale decreased. He also credits the strength of the market to continued low interest rates and improvements in farm income.
"There's a lot of cash in the marketplace looking for investment, both from operators and investors," he says. "Operators continue to buy the largest percentage of available farmland, but investors are becoming very competitive right now. The positive outlook for farm incomes will help operators be that much more competitive as we move forward."
Schrader likes to temper his outlook to the cautious side, noting that as we move through 2021, anything could happen that might affect the land market. Regardless, his focus is always to maximize value to the seller.
Based on outlook reports from various sources, it appears there will be little resistance in the land market moving toward year's end.
MIDWEST NUMBERS POSITIVE
Moving into midyear, there is nothing but bullish news on the farmland price front. The Illinois Society of Professional Farm Managers and Rural Appraisers' basic message continues to be that not much has changed.
Luke Worrell, of Worrell Land Services in Jacksonville, Illinois, notes statewide data continues to point to mild increases in value for excellent, good and fair soil types. Prices for average soil types, however, were less likely to show increases, and more likely to show slight decreases.
"The largest increase was in Class A farms, as high-quality farmland continues to carry the flag across the state," he reported at the end of the first quarter. "Findings suggested then that the table had been set for what should be an exciting 2021 in Illinois' agricultural economy." He added that, moving to the midyear point, the market had only strengthened since that earlier survey.
Average sales prices for 2020, as a whole, showed excellent land in Illinois averaged $10,870 per acre, about $400 more than in 2019. The average quality land was $6,409 per acre in 2020.
The Illinois Society provided some additional insights from its survey of farm managers and appraisers showing some 89% expected prices for farmland to increase during 2021, from 5% to 10%.
In Nebraska, the Farm Real Estate Market Survey reported average values of agricultural land increased about 6% statewide by early 2021. Irrigated land values increased more, at 8%. The increases were attributed to low interest rates, stronger commodity prices and COVID-19 disaster assistance payments to operators.
Jim Jansen, an Extension agricultural economist at the University of Nebraska and a co-author of the survey, noted that, during periods of economic uncertainty, monitoring farm and ranch real estate prices has been an important way to understand financial forces affecting land markets.
At Purdue University, the CME Group's Ag Economy Barometer, released monthly, tracks producers' attitudes about issues like commodity prices and land values.
In one of those surveys conducted in early 2021, 51% of producers said they expected to see farmland values increase over the next 12 months. This marked the first time in the history of the survey where more than half of respondents expected to see a short-term increase in farmland values. As for long-term upward potential, 62% said an increase was likely over the next five years.
A BROADER VIEW
Positive attitudes about farmland are being reflected nationally. National Land Realty released a survey of real estate brokers and agents showing more than half saw increased business in 2020 and believed the signs were in place for 2021 to close as another strong year for land sales.
Jason Burbage, president of National Land Realty, noted: "Almost 90% of our brokers are optimistic that land will do quite well over the next 18 months. More than 75% believe their businesses will grow at least 5%, if not more than 10%, in that time frame."
A veteran of the Southern land market, Bill Gates, says demand for productive farmland by investors is extremely high in his region.
"Investors are looking for productive farmland where they can overcome debt service and get a return, cash-on-cash, of 3% gross at least. The most desirable cash-on-cash return is in the 4% to 5% range," notes this owner and principal broker of Southern Land Company TN LLC, based in Germantown, Tennessee.
Gates, who doesn't auction land but only works through private sale, deals across the Southeast, primarily in four types of land: timberland, recreational timberland, farmland and mixed-use properties where farmland is mixed with good hunting land. The highest value in this category is for duck hunting.
"It's important to say there can be a lot of differences in buying land in this region," he stresses. "I am seeing some extremely high sales and demand in the straight recreational land market now. Those values go up when that land provides for duck and other waterfowl hunting. A close second is land geared to deer or turkey hunting."
When it comes to strictly farmland, Gates says it all depends on the area. He reports there are presently few cotton or rice farms on the market, and in both cases, interest and prices tend to be very strong.
"There is a demand, for example, strictly for certain types of cotton land. People are looking for that rolling topography, and sandy loam soils, that can produce cotton, soybeans, corn and even sweet potatoes. That is high-dollar rental ground, and it produces good sales."
Gates is seeing wide swings in average prices for cotton land and for rice land. For irrigated rice land, he says per-acre prices can vary from $4,500 to as high as $6,000 per acre, where land is precision leveled with good production history. Irrigated cotton land, based again on quality and ability to irrigate, can sell anywhere from $5,000 to $6,500 per acre on average.
Victoria Myers can be reached at email@example.com
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