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Farmland Seller vs. Buyer Motivation

Kyle Hansen, a broker/auctioneer with Hertz Real Estate Services, Nevada, Iowa, says the land market is starting to pick up, similar to a year ago.

Selling Activity

Last year, the volume of land on the market increased from July through the winter months and into the spring of 2018.

“There was a period when land sales slowed in the 2017 months of May and June. Yet, 2018 has seen land sales activity pick up again in July. This indicates that we may have an active fall,” Hansen says.

Randy Dickhut, senior vice president of real estate operations for Farmers National Company, says the seasonal uptick of farm sales this fall could stretch into postharvest and winter.

“We have been anticipating more of those ‘financially encouraged’ farm sales,” Dickhut says. These are producers who are liquidating assets to help their cash flow or balance sheets. I think we’ll see some of this activity as the stress in the farm economy continues.

“Our agents, licensed in 28 states, visit with lenders, and we’re being told there will be farmers this year who make the decision to do something different, get out of farming, or relieve some cash flow stress by selling out. This just stands to reason with what has been happening the past four years, economically,” he says.

Seller Motivation

Right now, what seems to be driving the land sales has a lot to do with the motivation of the sellers.

“It’s about what the sellers want to do with the proceeds,” Hansen says. With timberland, it’s sellers who have different individual interests. The market has moved up for those recreational pieces. Sellers are no longer personally using the land or have a desire to go somewhere else with their investment.

Listing vs. Public Auction

In recent years, more landowners have had real estate agents sell their property by way of public auction vs. the listing method. 

Hansen says the decision to sell by auction often depends on the characteristics of the farm.

“Is the farmland a high-quality piece that will be highly sought after? Typically, the best method of marketing that type of property is by public auction,” Hansen says.

Why? Because you never know what the motivation of the buyer might be or how high the buyer might be willing to bid.

However, any piece can be auctioned, as long as the reserve prices are realistic, Hansen says.

A reserve price is that amount that the landowner can refuse the sale of the property if the auction doesn’t at least reach that level.

On the flip side, if landowners choose to list a property when it isn’t highly tillable, they need a unique buyer such as someone with livestock for pasture areas.

There are other reasons why landowners choose a listing vs. public auction, Hansen says.

“Some sellers are not willing to have a public auction. They don’t want that focus on their family and that property. Rather, they want a more low-key sale, by simply calling some individuals in the neighborhood or trying to work out a deal with the tenant,” Hansen says.

Buyers Want Location

Right now, the trend for buyers of farmland has a lot to do with where the piece is located.

“Especially if the buyer is a farmer. That producer wants land in a specific area that is easy to access and has medium- to higher-quality soil,” he says.

Meanwhile, an investor who is not necessarily concerned about location typically leans toward the higher-quality land, Hansen says.

“The reasoning there is that the higher-quality land will sell at a premium or hold its value if the investor decides to sell in the next five to 10 years,” he says.

It should be noted that there is a greater opportunity to buy a lower-graded piece of ground and get a better rate of return on it without having to pay the high purchase price, Hansen says.

Outside investors still buy lower-quality farmland and then improve it through better irrigation systems, better drainage, building grain bins, and leveling fields.

Dickhut says farmland buyers have gotten cautious recently due to the weaker farm economy.

“They (producer-buyers) are more cautious, but they also realize that land is a long-term investment,” Dickhut says.

“Because very little land comes up on the open market in any given year (less than 1% of all farmland), when a farm does come up for sale and makes sense for a farmer or rancher, it may be a once-in-three- or four-generations opportunity,” he says.

What Sellers Look for Now

So, what are farmland sellers looking for right now, aside from the highest bidder?

The net proceeds of a farmland sale should meet the seller’s goals for that money, Hansen says.

“Liquidating an estate, managing trusts with multiple family members involved, and other outside factors can force a sale. For the majority of our sellers, this is the motivation to move the land,” Hansen says. “Granted, there are some farmers who are retiring and selling, but that is not the concentration of sellers right now.”

Annual Land Returns Dwindle

From an investment angle, farmland has been a good long-term investment choice for investors’ portfolios. That may be changing, according to farm agents.

“The land market has gotten extremely competitive, and it’s become disconnected from what yields and commodity prices are compared with what the land values are right now,” Hansen says.

Land values have stayed strong and steady, even since 2013 (the peak of land prices), dropping only 20% to 25% in land costs. This compares with commodities prices dropping 50% in that same time period.

“Because of those two dynamics, we are seeing a lower rate of return on land investments. We used to see an annual cap rates (comparing current income vs. price) of between 4% and 6% on farmland, compared with current cap rates at 2.5% to 3% on the very best land,” Hansen says. 

Keep in mind, this is just the current cycle that farmland values are in, and it doesn’t take into account appreciation rates. The long-term return on farmland investment remains positive.

Trends to Watch

High-quality land is staying steady in price and even increasing in certain locations, a trend in farmland that is worth keeping an eye on, Hansen says.

“Medium-quality land is staying steady or softening. Lower-quality land is softening and increasingly weaker in value due to trade tariffs and the fall of commodities prices,” Hansen says.

The other key farmland trend has to do with the ability of farmers to buy land.

Statistically, farmers buy 70% to 80% of farms that come up for sale.

Resolved global trade tariffs, negotiated trade agreements, changing commodities prices, and farmer attitudes  could help farmland values.

As always in the real estate business, the old saying of location, location, location relates to farm sales, too.

“If you are selling in an area that has active buyers and a strong area economy, that piece of ground will bring a high price. If your high-quality land for sale is in a poor location or an area that isn’t as active in the bidding, a good-quality piece could sell below the market,” he says.

Other trends supporting the farmland real estate market include world water shortages, the financialization of agriculture (the increased interest in U.S. ag production), and the rise of technology.

“The rise of technology – whether it’s seed breeding improving the yield potential of crops or the machinery efficiencies and planter capabilities – makes each acre more productive,” Dickhut says.

“As a result, when land is more productive, it has the potential to produce more value. So, long term, these trends are supporting higher land values. Higher productivity is getting capitalized into land values,” Dickhut says.

Written by Gene Johnston and Mike McGinnis

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