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Tips to handle today's farmland market
Looking for proof the farmland market is starting to plateau? Look no further than the fields of Iowa, where the often-foreshadowed plateau in land values seems to be reaching fruition, at least in parts of that state, new information shows.
Iowa has seen a meteoric rise in land values in the last few years, some say more so than other Corn Belt states. Now as the costs and returns for a crop start to converge and factors like taxes start to compel landowners to keep their hands on their land, prices are starting to hit the plateau experts say has been on its way for months.
"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," says Randy Hertz, accredited farm manager and land consultant with Hertz Farm Management, Inc. "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 an acre in capital gains. 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."
Recent data show that three crop-reporting districts of Iowa -- the Corn Belt state that's seen the greatest volatility in land price shifts in the last few years, Hertz says -- saw a tapering-off in their climb in value: Northeastern, southwest, and west-central Iowa. Much of that slump has come as a result of commodity prices slipping, interest rates, taxes, and a continued lack of "stable alternative investments." This is compelling landowners to hold tighter onto their land in many cases, says Kyle Hansen of the Iowa Land Realtors Institute, leader of a statewide survey of farm managers, rural appraisers, and ag lenders.
The leveling off in land values isn't quite yet reaching every corner of the Corn Belt, though. Even if prices stay in the black for the coming few months, that doesn't mean the reversal in Iowa won't spread to other major corn- and soybean-growing parts of the nation's center.
"These prices are not at the level of increases we’ve seen in recent years, but they are still upward," says Dale Aupperle, a farm manager with Heartland Ag Group in Forsyth, Illinois, and chairman of the Illinois Land Values and Lease Trends project, which recently conducted a similar survey of land values in that state that showed values are still climbing, but leveling off in their rise.
If the boat does tip, and values do dip into the red, how far might things go?
"While most bankers expected farmland values to remain at current levels, an increasing number of respondents felt farmland values may have peaked. Compared with previous surveys, fewer bankers expected farmland values to keep rising. More bankers also expected farmland values to drop after harvest likely due, at least partially, to expectations of lower farm income," says Nathan Kauffman, economist with the Federal Reserve Bank of Kansas City. "Among bankers anticipating a decline, though, a majority of estimated farmland values would fall less than 10% during the next year. Very few bankers expected that farmland prices would drop more than 10%."
So, what should you do? Hertz recommends three things to help navigate a shaky farmland market:
Maintain a 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.
Continue making cash grain sales. Doing so will help you keep a consistent income streaming in, regardless of where the land market is going and how those sales may affect your ability to secure more land. "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," Hertz adds. "You've still got to make a decision."
Look again at land rents. "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," Hertz says.
More farmland value/rent features and discussion
- Adding up farmland value factors
- Illinois land climb seen leveling off
- Talk: Is the farmland top in?
- Have farmland values seen their top?
- Farmland ownership trends shifting