Farmland Prices Stay Strong

Demand exceeds supply in many regions, but rising interest rates may soften sales.

Farmland is still considered a stable investment that gives buyers long-term confidence, Image by Elaine Shein

Farmland values continue to shrug at lower grain prices. Even in wheat country, the Federal Reserve Bank of Kansas City reported relatively stable farmland values for the fourth quarter 2017 in the ag-centric district covering Colorado, Kansas, western Missouri, Nebraska, northern New Mexico and Oklahoma.

On average, values for all types of farmland in the Kansas City Federal Reserve district declined only 3% from a year ago. Looking ahead, bankers in the district expect values to remain steady through 2018. The Federal Reserve Bank of Chicago in November reported farmland values plus or minus 1% across that district in that late-quarter report.

“Buyers are looking for stable income, and farmland has traditionally delivered that stability,” explains Doug Hensley, president of Hertz Real Estate Services, Iowa. “In every county, there are a number of farmers who are financially capable and open to buy that ‘good farm.’ And, as they say, you buy the farm when it’s available, not when it’s convenient.”

Steve Bruere, president of Peoples Company, also in Iowa, agrees. “Eighty percent of the buyers are farmers. People will step up if a good farm is for sale. Farmers are still the aggressive buyers.”

STRONG RECENT SALES. A competitive Hertz auction recently in Iowa’s Benton County brought $14,300 per acre. That was for 176 acres with soils that have a projected corn yield of 220 bushels per acre.

“We had six or seven active bidders,” Hensley reports. The buyer was a neighboring landowner who beat out a contending investor.

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Peoples Co. has seen that same aggressive action at recent auctions it’s held. One of note, in central-Iowa’s Dallas County, brought $10,950 per acre for a 40-acre parcel. Bidders included neighbors, investors and tax-deferred land-exchange buyers.

Peoples Co. tracks all public auctions in Iowa for farms that are 85% or more tillable. The organization calculates price based on a productivity rating to make it easier to compare equivalent values. Iowa uses a CSR2 (revised Corn Suitability Rating) rating system in which a rating of 100 is equivalent to a projected yield of 240 bushels of corn per acre.

In 2017, of the 685 farmland auction results collected by Peoples Co., the average price per CSR2 point was around $120. That means a farm containing soils with a projected yield of 200 bushels (83 CSR2) would sell for around $10,000 per acre. In the fourth quarter 2017, farms sold at auction in Iowa were averaging $124 per CSR2 point.

These strong land prices continue to surprise many, however. “Most farmland investors have been waiting for a pullback in land values, which hasn’t transpired yet,” Bruere notes.

WHO’S BUYING, SELLING. A tax exchange, once very common in land sales, is once again the cause of a fair amount of activity in the land market, Hensley notes. As development rings out from Des Moines and the Cedar Rapids/Iowa City corridor, he says, “farmland is a stable investment that gives buyers long-term confidence. Just about anyone you talk to thinks farmland will be worth more 30 years from now.”

Many sellers now are trusts that have inherited farmland, Bruere reports, adding, “we are seeing some profit-taking across the Midwest from land funds that formed in 2008 with a 10-year window. They now need to sell some land to return money to their investors.”

There is also some pressure from lenders on farmers who can’t cash-flow their operations. “It’s more of a suggestion than a forced sale at this point,” Bruere explains. Bank regulators don’t like to see borrowers with carryover debt for more than a year or two, Hensley adds. So, while there is some pressure from lenders who are “encouraging” sales, it’s not enough to move the market.

A key to the strength of the market continues to be availability. The amount of farmland for sale is still tight in most areas.

“Although strength in values is uneven from neighborhood to neighborhood,” Hensley explains, “the areas with the most potential for softness currently are where we’ve had or seen multiple land sales in the past 12 to 18 months. Those previous sales have drawn capital out of the market. So, when it comes to futures sales in those same areas, sellers need to understand that there may not be as much competition for future sales. It all comes down to what happens to commodity prices, crop-production success and interest rates.”

At press time, Bruere noted there were only 150 farms with 85% or more tillable land listed for sale in Iowa. “That’s less than two per county,” he says.

So for now, demand for farmland exceeds supply, especially on high-quality ground. Lenders and farm brokers expect that trend to continue barring any unforeseen economic calamity.

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