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Adding up farmland value factors
Death and taxes. The old saying is those are the only two certainties in this world. And right now, that's especially true for the farmland market.
There's not as much land going onto the market for sale right now -- for a few reasons -- and that calls for anybody looking to add acres to their farm to always be ready to pull the trigger, says one farmland market expert.
The proposition of buying or selling land, especially the latter, is typically an emotional one, and as such doesn't always follow market fundamentals and dynamics in lockstep. So, in lieu of a textbook for how to approach buying land when considering these factors, it's important to always be ready when the time arises that circumstances dictate a seller to pull the trigger, says Randy Hertz, accredited farm manager and land consultant with Hertz Farm Management, Inc.
"Certainly, you need to be in buying position. As people get panicky, they may be willing to take a lower price or offer lower than the general public really would anticipate. It's an emotional decision," he says.
That emotion is typically manifested directly in how buyers approach potential land buys from sellers who, whether it's the settlement of an estate by multiple stakeholders or a retirement, may be facing just as emotional a set of circumstances themselves. Combine that with the fact that buying land is a long-term decision, and it can make it tough to forecast how any given land sale will shake out. Then, add on to that variables specific to years like 2013, namely whether the land was planted or laid idle because of adverse weather, and sale prices are tough to peg. All this adds to the importance of staying in that buying position, Hertz says.
"As the markets go against you, it's an angst. As prices go up, you feel good about things. There's a lot of prevented-planting acres this year. In those areas, it certainly was negatively impacted by the emotions of struggling crops," he says, adding that a recent Iowa land sale netted a lower-than-expected price because it hadn't been planted in the spring because of the weather. "People get bullish at the top. People overstay the market. Farmers are notorious for this. They ride it up, ride it down, and right at the bottom, freak out and sell in the bottom third of the market.
"It's such an imperfect market," he adds.
Right now, a major factor playing into both the amount of land going up for sale and the price volatility those sales yield is the state of the economy, both on the macro level and in the ag sector. In the former, taxes and return on investment are huge factors. Farmland remains a solid investment compared to equities, and with the tax implications of selling land as they are right now, it makes it easy to hold on, even if the climb in land values is seen tapering off.
"There are just fewer farms on the market now. The reason for that is when you've got a land market that increases in value, people don't want to pay taxes on that increase. And, you've got low interest rates. They say 'I'm earning 3% to 3 1/2% on rented land. What would I do if I sold? I'd have to pay tax on $9,000/acre in capital gains," Hertz says. "You're going to pay one-third of that in taxes, plus the privilege of 1% on a CD. So, you've seen a lot fewer farms for sale. Ones selling are ones stepping up in basis, estates or families fighting."
More specific to the ag sector, crop inputs and cash land rents will continue to drive where sale prices wind up moving forward. The former group influences the direction of the latter, and how close rents have kept up with the general fluctuation of land values will help determine the willingness of landowners on the fence to sell land.
"The dynamics of the farm market, specifically inputs have rocketed. Cash rents have not kept pace with the profits farmers have gotten. People are wondering what will happen with cash rents," Hertz says. "If you had not increased along with where it should've been, you probably should've gotten an increase. If you were pretty good but not at top of the market, rent will probably be pretty good next year. If you were at the high for cash rent last year, probably adjust downward."
Specific to the last few years in the heart of the Corn Belt, the shape of the current crop on top of how sharply the land market's fluctuated in the last five years will likely contribute to how it flexes and moves in the future, Hertz says. That's clear when comparing past moves in key states in the region.
"Illinois and Indiana are really strong right now. They've got a good crop coming, and they have been somewhat toned-down in their increases. Certainly not as fast as the increases Iowa has seen," he says. "You're going to see some adjustments like that."
And while he fully expects the general rise in farmland values to taper off in the coming year, Hertz says current strong grain prices will likely keep the market out of the red, even if this year's crops don't amount to earlier expectations.
"How could you ever look a gift horse in the mouth? We can sell new-crop soybeans for over $13/bushel cash. Those are phenomenal prices. Yes, we're going to get kicked in the shorts with our soybean yield, but you still have to sell the stuff," he adds. "You've still got to make a decision."