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Are Public Auctions Off Base?
Peoples Company tracks all land sales of 35 acres or more in Iowa on a weekly basis. Our data reveals some interesting trends. Iowa uses the 100-point CSR2 soil productivity rating to measure the productivity of a farm. Farms with a higher CSR2 are generally of higher quality and productivity. The real estate industry uses the price per CSR2 to gauge the strength of the farmland market and to compare the results of land sales. While it’s not perfect, this method gives an overall sense of the trend in values.
In 2017, there were 790 tracts marketed for public auction, with 738 selling. This represents over 86,000 acres with a total value of $562 million. The average price per CSR2 point of all sales in our auction database was $120, with the land market gaining strength throughout the year. For example, a farm that sells for $8,000 an acre with an 80 CSR2 would translate into $100 per CSR2 point.
is it truly a seller’s market?
This data shows that land prices have proven to be surprisingly resilient and haven’t followed rental rates down like many people anticipated. The question is whether the auction results reflect the overall strength of the farmland market. Is it truly a seller’s market? Our company struggles to replicate the results of its auctions when negotiating off-market transactions or when negotiating a price on a traditional listing. It’s difficult to get buyers to step up in these private negotiations to the degree they have in an auction setting. This begs the question: Does the auction method of sale generate a higher sales price than the other methods, or could there be something else driving this? Perhaps the properties that are being auctioned represent land that is of superior quality and has not been available in a number of years. Perhaps the attributes of the farms that are sold at auction are superior to the overall market.
Consider judging the strength of the car industry by sales at a Barrett Jackson auto sale where only the best cars are brought to the auction. Does that reflect the overall strength of the auto market, or the demand for rare and high-quality collectible cars that benefit from a competitive bidding process?
I would argue that the strength in the land market is legitimate and it is, in fact, a seller’s market. There continues to be interest in owning farmland from both farmers and investors. The future for farmland looks great. Yet, I do think the underlying fundamentals don’t necessarily support the prices you are seeing at auctions, where farmers represent roughly 80% of all buyers.
There are 30 million acres of cropland in Iowa, and research suggests 1% of the farmland market turns over annually. If 1% of the 30 million acres turns over, this would suggest 300,000 acres change hands annually in Iowa. In comparison with our auction database, we are tracking results for 86,000 acres or just shy of 30% of the acres that turn over each year in Iowa.
The results you read about in farmland surveys reflect the opinions of the professionals in the business. These are, in large part, driven by auction results and the professional’s perception of the market. Yet, the majority of the land transactions that happen are not at public auction and are negotiated privately, either through a traditional listing or an off-market transaction. Private sales results are not known without researching the sales price at the courthouse. The perception that the land market is strong is driven, in large part, by public auctions. After all, auctions represent the purest form of price discovery.
I consistently tell my clients that auctions are ideally suited for properties that are of high quality where there are multiple bidders competing to own the property. These properties, like a rare car, can trade at a premium to the overall market.
For properties that don’t have those attributes, finding a buyer to step up at the same price per CSR2 point that we are tracking in our auction database can be a challenge.
About the Author
Steve Bruere is the president of Peoples Company, an Iowa-based land brokerage with a diversified offering of land management, land appraisal, and land investing services in 20 states.