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Farmland Values Hold Strong
Go to a farmland auction this year, and you’ll probably come away thinking the farm economy is in fine shape.
Farmland values appear stubbornly oblivious to bad news. There’s a growing disconnect between farm profit margins and what people will pay for ground, says one farm real estate agent.
While most farm commodity prices remain at or below breakeven, surveys around the country verify the underlying strength in the farmland market.
The University of Nebraska farmland value survey reports that, while overall farmland values are down 17% from the 2014 peak, center pivot-irrigated farmland in the eastern part of the state still averaged more than $8,500 an acre last year, unchanged from the year before.
The Illinois Farm Managers and Rural Appraisers annual land value survey shows that farmland in the excellent category in that state still averages over $10,000 an acre.
Federal Reserve Bank surveys show that the average value of good farmland in Indiana is up 3% in the last year. Ditto for Iowa. Plains states farmland values are steady.
What gives? In across-the-country interviews with the people who watch the farmland market the closest – farmland real estate agents – we pinpointed several things propping up the market for farmland, despite the weak cash flows on most farms.
Experts say farmers continue to be aggressive bidders when ground comes onto the market. Several common factors drive this strength.
Cash reserves. Some farmers held on to cash from the good years of 2014 and prior, and they’re still sitting on it. Chuck Wingert of Wingert Realty and Land Services in Mankato, Minnesota, says at least 65% of buyers in his region are expansion-minded farmers. “The good ones tucked away some money. They’re in a good position now to make land purchases,” he says.
Attractive prices. While there is current strength in farmland prices, they’ve still taken a 15% to 30% hit from the highs five years ago. That makes today’s prices look attractive, and this draws bidders. Their attitude is, “It’s time to be in for the next up-move,” says Wingert.
Low interest rates. They’ve ticked up slightly in the last year but still are historically low. Steve Bruere, president of Peoples Company, an Iowa-based farmland broker (peoplescompany.com), says rates of 4.5% to 5.5% are available in fixed rates and perhaps lower in a variable rate. It also means there are fewer good alternative investments to farmland. If institutional investors can project a 4% ROI or higher, they’re interested. “It’s a hard asset you aren’t going to lose,” says Jeramy Stephens of National Land Realty in Arkansas.
Pent-up demand. This factor is hard to document, though Bruere thinks it is true that some farmers chose not to invest back in the go-go days when corn was $7 a bushel, thinking the market was hyperinflated. “Now they’re ready to pull the trigger.”
Limited offerings. On the day of the interview with Successful Farming magazine, Bruere said records showed only 498 farms for sale in all of Iowa, and only 124 of them were in the 80% or greater tillable category. “That’s as low as I’ve ever seen,” he says.
A hungry world. Looming world trade conflicts are daunting, scary, and uncertain. Still, most farmland investors, particularly farmers, know that when the dust clears, the global demand for food is growing. Bruere says, “Buyers today are looking at the long term.”
Once in a lifetime. It’s an old saying, but it’s still true: A piece of land may come up for sale only once in your lifetime. “The best time to buy a farm is when someone wants to sell it,” is the way Bruere puts it. “Even if you have to pay a little more than you want, you’ll be OK in the long term if you can weather a couple of downswings.”
- Read more: Farmland Seller vs. Buyer Motivation
Written by Gene Johnston and Mike McGinnis