The Real Farmland Market
Top-Dollar Sales Grab Attention, But Don't Tell the Whole Story
INDIANOLA, Iowa (DTN) -- Coffee shop conversation on the land market tends to focus on the "whoppers."
Two 80-acre tracts in northwest Iowa's O'Brien County each sold for $14,000 per acre at auction in early September.
In McDonough County in western Illinois, two 40-plus acre parcels recently sold for $12,800 and $13,000 per acre.
In east central Illinois, 991 acres sold to one buyer for $10,322 per acre near Casey, Illinois, at an August auction.
Those sales may grab the headlines, but they are not typical of today's land markets, farmland brokers told DTN. What you don't hear about are the auctions that don't result in a sale.
"We've had four or five recent auctions that ended in no sales," said Howard Halderman, president of Halderman Real Estate Services in Wabash, Indiana. One seller wanted $9,000 per acre, and the bidding topped out at $8,300 per acre.
Brokers say those farms tend to sell privately within a week or so after a no-sale auction.
Brokers say the difference between a strong sale and a no-sale auction is a show-piece farm with financially strong farm neighbors.
The list of bidders for the McDonough County, Illinois, tracts was "long and distinguished," said Doug Hensley, president of Hertz Real Estate Services, who grew up in that area. "This was in a neighborhood where they hadn't had a farm auction in two years, so land doesn't come up for public sale very often. And in that area, it's such high quality land, that we consider it a crop failure when corn yields are only 180 bushels to 200 bushels per acre. The ground is extremely productive. Well-drained fields can typically yield 250 bpa to 270 bpa corn and 80 bpa soybeans."
The Casey, Illinois, farm auction had three competitive bidders at the end who bid the combined 11 tracts from $6 million to $9.9 million in 10 to 15 minutes, Halderman said.
NEIGHBOR INTEREST MATTERS
Financially strong farmers buy when their neighbor's farm comes up for sale, often bidding values past rational levels, said Steve Bruere, president of Peoples Company in Clive, Iowa.
But after four years of declining farm profits, the number of financially strong farmer buyers is shrinking.
"At farm auctions in 2013, we'd have 50 people at an auction. Now there is usually one or two bidders for a piece of land," he said.
Sam Kain, assistant vice president of real estate for Farmers National Company, agreed. "We still may get 14 or 15 bidders registered at an auction, but only two or three will bid."
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Neighboring farmers make a huge impact on how high the land will sell at auction, Bruere said. If your neighbors are a family trust not interested in expanding, or your neighbors recently bought land and don't want to get overextended, it may be hard to get top dollar.
In general, farmers are still outbidding investors.
"Farmers still make up 80% of the land buyers and that keeps strength in the market," Bruere said. "Farmer buyers are often satisfied with a lower capitalization rate of say, 2.6%, because they take a longer view of land buying, and a lower current return is not as important to them as building up their land base. Whereas an investor is looking for a 3.5% to 4% return on his investment."
For example, if a farm cash rents for $275 per acre, a farmer buyer may bid up the price to $10,500 per acre (275 divided by $10,500 = 2.6%). However, an investor would look at that same farm with a $275 per acre rent and not want to pay more than $6,875 per acre (275 divided by $6,875 = 4%).
QUALITY SELLS THE FARM
Another major factor in how high a piece of ground sells for is the quality of the farm. The O'Brien County, Iowa, 80-acre parcels carried a corn suitability rating of 94 and 97, which is measured on a scale of 0 to 100. A 100-rating equals a projected corn yield of 240 bpa.
"You're seeing a bifurcated market where quality farmland is retaining its value, and the low quality ground is hard to sell," Halderman said. "The next day after selling the Blue Mound farm with strong interest in Casey, Illinois, our firm had a sale in Indiana... It was one-third wooded and needed drainage and no one was interested in buying it."
Halderman said a neighbor to the Indiana farm told the agent he'd driven by that farm for years and it never struck him that he needed to own it.
UNCERTAINTY IN THE MARKET
Without a farm bill, a trade agreement with Canada and an escalating tariff situation with China, the future of the ag markets are unclear.
"The level of uncertainty in the commodity markets is underlying a general sense of nervousness in the land market," he said. "There still are bidders out there, but at a more conservative price."
Hertz's Hensley agreed, saying the Midwestern land market is in a holding patterns.
"Farmland owners play the long game pretty well, but the headwinds from low commodity prices over an extended period will eventually translate into lower land values," he said.
With interest rates ticking higher and the tariff situations disrupting well-established trade patterns, he said it's disrupting the market.
"In my 35 years of selling farmland, I've not been more confused as to what the market is right now," said Kain. "One farm will do well and a similar farm will not. There is a lot of caution in the market right now. Potential buyers read about low commodity prices and think land will get cheaper."
Recent farmland market surveys seem to bear that out. Here are some of the highlights:
--The Iowa chapter of the Realtors Land Institute showed Iowa land values down slightly (-1.7%) in September 2018 compared to March 2018.
-- The Illinois Society of Farm Managers and Rural Appraisers reported excellent quality land down 2% between Jan. 1 and July 1 of 2018. It dropped roughly $200 per acre to $10,522 per acre.
https://s3-us-west-2.amazonaws.com/…
-- The Nebraska Farm Real Estate market survey showed land values down an average of 4% on Feb. 1 compared to 2017.
-- The Kansas City Federal Reserve in its second quarter report said Nebraska irrigated land had dropped 7% compared to the previous year, non-irrigated land was down 2% and ranchland fell 5%. For Kansas, land values decreased 1% for irrigated land, declined 4% for non-irrigated cropland and reduced 3% for ranchland.
https://www.kansascityfed.org/…
-- The St. Louis Federal Reserve reported quality farmland in its district had fallen an average 3.5% in the second quarter of 2018 relative to a year ago.
https://files.stlouisfed.org/…
-- The Chicago Federal Reserve survey of bankers showed Illinois farmland down 2% on July 1, 2018 compared to 2017, Indiana no change, Iowa farmland rose 1% compared to July 1, 2017 and Wisconsin cropland actually climbed 4% compared to a year earlier, according to its survey.
Elizabeth Williams can be reached at elizabeth.williams@dtn.com
(KD/BAS)
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