You are here
Making 5-figure farm land prices work
Commodity prices have spent the last few months on the decline. But, a recent $20,000/acre farm land sale in northwestern Iowa shows the land market has yet to share the same trend.
The recent land sale, during which a 74-acre piece of ground was purchased by a farmer in northwestern Iowa, highlights the trend of land in that crop- and livestock-rich area. Though the area is known as being "unique" when it comes to the demand for farm land, the $20,000/acre sale isn't an anomaly; a year ago, a nearby farm sold for $13,500/acre and 2 months ago, more land sold for $16,750/acre, says Iowa State University Extension farm land specialist Mike Duffy, who conducts the state's annual survey of farm land values (due out this year on December 14).
"I guess I was surprised to see that it's continuing to move up like that given the commodity markets are settling out a bit," Duffy says. "It's definitely quite a bit more than most of what we're seeing. Is it the end? I don't really know."
Why, when the grains have slipped, have land values not? For one, there's not really a viable alternative long-term investment compared to farm land right now, say some farmers. While land isn't "the only game in town" for investment dollars, its lack of a field of competing investments makes it attractive.
"Currently, Wal-Mart is paying a 2.5% dividend and is growing their dividend about 15% to 20% per year," says Agriculture.com Farm Business Talk contributor MoInfo. "In 10 years, which investment do you think will be better?"
Duffy says that's just one of several fundamentals keeping the land market higher. Though they've fallen, commodity prices remain at profitable levels. Add to that low interest rates and strong demand, and there's reason to believe the land market will remain on relatively solid footing in much of farm country.
"Those conditions have changed a little, but the market still has this kind of inertia behind it," Duffy says. "The fundamentals are still there. Are they there for continued $20,000/acre prices? That's debatable. But, they obviously could do it."
Then, there's the adage that "economics get you to the auction, emotions get you bidding," Duffy says. Some say that is often the case, especially in instances where bidding comes down to 2 farmers and the land has a specific connection to one or both seeking the land. Emotion sometimes overrides economics once the bidding starts.
"My first reaction was that it had nothing to do with business really, but had to have an emotional element involved," says Farm Business Talk veteran contributor Kay/NC.
In this particular instance, there were personal connections to the land at auction, and in terms of the area in general, there are specific factors that make land at these price levels work, some farmers say.
"It is very unique and this land will probably never come up for sale again in 100 years," says Farm Business Talk veteran contributor jrsiajdranch, who farms east of the land sold this week. "The best time to buy the farm is when it is for sale."
Adds Farm Business Talk member highyields: "I don't believe they miss a crop very often. They used to have a lot of livestock feeding," he says. "If they have the money and the banks are willing to bank them, then let them buy the land. I'm glad they got it. I have no idea why this sale is different than the $16,000/acre one year before. No one carried on about that one."
Getting that banker to sign off on a deal like this is still well within reason at current price levels, Duffy says, if the right conditions are in place. An established farmer with an existing acreage base can likely make deals like this work.
"With normal pricing and normal costs, you can make that cash-flow within reasonable circumstances," he says.