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Iowa farmland up 24%; is it a bubble?
Iowa farmland is worth, on average, just shy of $1,600 an acre more than it was a year ago.
The 23.7% increase, up to $8,296 an acre on average statewide, is the key finding in the 2012 Iowa Land Value Survey, led by Iowa State University (ISU) Extension ag economist and land values specialist Mike Duffy, who released the results of this year's survey on Tuesday in Ames, Iowa.
Land netted the highest average sale price in the northwest part of the state, where values tipped in at $11,404 an acre. On the other side of the spectrum, the lowest land values came in south-central Iowa at $4,308 per acre. The former value is a jump of almost 37%, the greatest year-over-year climb among the state's nine crop reporting districts.
"This is the third year in a row where values have increased more than 15%. This also marked the eighth time in the past nine years where values increased by double digits per year," Duffy said Tuesday. "Iowa land values have increased more than two and a half times since 2003. The values have increased an average of 15.1% a year for the past decade. Obviously, these increases raise concerns there will be a major correction in land values."
So what's been behind the last year's rise? High grain prices make up the largest driver, with more than 3/4 of those responding to the survey citing them as a major bullish factor.
"The second most frequently mentioned factor was low interest rates, mentioned by 63% of the respondents. Other frequently mentioned positive factors included cash/credit availability, good return to land, lack of other investments, and land availability," Duffy said.
Among the factors that survey respondents, a group comprising licensed real estate brokers and "individuals considered to be knowledgeable of land market conditions," there were some that were seen as negative to the land market and its future movement. Among those are bad crop weather, a feeling land values are already too high, an unsteady ag policy arena, and high crop input costs.
One noteworthy finding in this year's survey is the rise in the amount of land going onto the market. High prices are the main reason, but a lot of anxiety about tax hikes down the road have some sellers more motivated than in the past, Duffy said.
"A...reason for the increase in activity is the uncertainty caused by the possible changes in the estate and capital gains tax rates," he said. "Added to this uncertainty is the concern that land values may be at a peak, and there will be a dramatic decrease in values forthcoming."
So, is there a bubble building in the land market? To answer that question, Duffy says it's important to look at a number of factors:
Income. "Theory tells us it would be the net income per acre that is key, but analysis shows us that the total income is a better predictor," he says.
Crop prices. "Coming into 2012 there was a general sentiment that prices would decline from their peaks. But the drought changed this, and the prices remained at high levels. How long the high prices will last is unknown," Duffy says. "The world is also responding to higher prices, and there is an expected increase in plantings everywhere. This increased supply will eventually drive prices back down. This is similar to the early 1970s when prices increased dramatically and later declined to a new equilibrium level."
Production costs. "In the past, costs have risen in response to higher commodity prices. This is especially true for rents. The ISU estimated costs of crop production have shown a 61% increase in the cost per bushel since 2005," Duffy says. "Without land, the increase has been 87%. There are reports of exorbitant rents being paid. This could expose farmers to financial trouble with decreasing prices and/or yields."
Interest rates. "Currently interest rates are at their lowest levels in memory. There is no indication that interest rates will be increasing any time in the near future," he adds.
Debt. "During 'bubbles,' debt levels increased and when the asset values began to drop, people were put in a position where they owed more than the asset was worth. This either led to default or to forced sales, which decreased the asset value even more," Duffy says. "Currently debt doesn’t appear to be a problem in the land market."
Land remains a solid place for investment, especially as the equities markets remain in a volatile state. Whether that continues to be the case will go a long way to determining when, if, or how the land market does reverse course. And right now there are a lot of questions about the influence of these other markets on the value of farmland.
"Predicting land value changes is always a difficult task, but it is especially difficult in times such as these. People who lived through the 1970s, the collapse in the 1980s, and the urban real estate collapse of a few years ago know that what goes up can come down," Duffy says. "Will Iowa land values be like a bubble bursting as in those times, will there be a more gradual correction to a new plateau in prices, or will there simply be a decrease in the rate of increase and we won’t experience any major corrections at all?"