Double-digit land value gains
Farm land values rebounded big-time in Iowa in 2010. But now, as they again start to return to the record-high levels seen in the late 1970s and early 1980s, that doesn't mean the collapse in that market that followed in the 1908s is slated to repeat in the coming years.
Land values are up in all 9 of Iowa's crop reporting districts, announced Iowa State University (ISU) Extension economist Mike Duffy on Wednesday morning, who conducts the annual survey of licensed real estate brokers and selected individuals considered to be knowledgeable of land market conditions. The northwestern and central parts of the state saw the sharpest gains, with 2 counties surpassing the $7,000/acre mark for the first time.
Values jumped 15.9% between November 2009 and November 2010. That increase follows a 2.2% decrease the previous year. The statewide average land value as of November 1 was $5,064 per acre, up $693 since November 2009.
O'Brien County topped this year's list, with an average per-acre value of $7,148, up almost $1,000/acre from a year ago, followed closely by adjacent Sioux County at $7,048. It's only the fourth year in the Iowa Land Values Survey's 60-year history that Scott County, in eastern Iowa, hasn't had the highest land values in the state.
"If we adjust for inflation, you can see we're actually not back to our peak in inflation-adjusted terms that we saw back in 1979," Duffy said Wednesday. "Where we are today is about where we were back in '75, somewhere like that. We're not back at a peak in real terms."
There are both positive and negative factors driving the land market. High commodity prices were mentioned by 82% of the respondents as a positive factor. The second most frequently mentioned positive factor was low interest rates, mentioned by 54% of the respondents. A limited supply of land available for sale was mentioned by 19% of the respondents as a positive factor.
The poor general economy was listed by 27% of the respondents as a negative factor. High input costs were listed by 20% of the respondents. Land becoming too high was listed as a negative factor by 19% of the respondents.
If that peak is reached, however, will the same series of events that followed the 1979 peak happen again? Will the bottom drop out of the market? Duffy says at this point, that's not likely. Not as much land has debt against it now as in the early '80s, and debt levels for farmers -- who are still buying the majority of Iowa's farmland, not investors -- are more manageable than they were leading up to the market's gutting in the 1980s.
"Only 2/3 of the land in Iowa has any debt against it, but in the 1970s, about 3/4 of the land had debt against it. We aren't seeing the debt being taken on to finance a lot of these land purchases than we were then, either," Duffy says. "They're either being done with cash or based on already relatively low debt levels."
Still, there are a couple of newer variables in play: Number 1, Duffy says what happens within the ethanol industry will influence land prices in Iowa, since roughly 1/3 of the state's corn crop for the coming year is projected to go toward ethanol production.
"It would have an impact on prices, no doubt about it," Duffy says. "This is something we need to watch."
Secondly, more land is being farmed by renters. Farm size is increasing, and more farmers are increasing the bases for their operations. But, more of that's happening with rented land, something that "adds a new layer of risk to these operations than if I own the land.
"If we look at the increase in farm size, a big part of that is being done with rented land," Duffy says.
Duffy says he is often asked if we are on a speculative bubble. “My feeling is that, at least in the near term, fundamentals dictate the type of increases we have seen.” He says commodity prices are up over 30% in the last six months and interest rates are under 6% for only the second time since at least 1974.
The volatility in corn and soybean prices and production costs lead to tremendous uncertainty and volatility in the land market, as historically reflected in the Iowa State survey. Land values were up 22% in 2007, down 2.2% in 2009 and up 15.9% in 2010. Since 2002, Iowa land values are up 93%.
“In addition to the volatility in prices and costs, there has been a substantial shift in the fundamental supply and demand situation for farmland,” says Duffy. “Over 60% of the 2009 respondents indicated there were fewer sales in 2009 compared to 2008. This was the largest drop in sales reported in the Iowa State survey. In 2010, almost three-fourths of the respondents said sales were either the same or less than 2009. This shows the slump in sales is either continuing, or in some cases worsening, throughout the state.”
The Iowa State University survey matches the results in other land value surveys. The Federal Reserve Board estimated a 17% increase in Iowa land values from October to October. This estimate was based on a survey of lenders in Iowa. The Iowa Chapter of the Realtors Land Institute estimated a 5.7% increase in Iowa land values for the six months from March to September 2010.
Editor's Note: Rich Fee and Jeff Caldwell compiled this report.