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Why Isn’t Land Cheaper?
Agriculture has suffered through four years of lower commodity prices and reduced profitability in the farm sector.
So why don’t land prices reflect this?
The short answer: It’s because farmers and investors keep buying land.
Farm operators continue to be the primary buyers at land auctions, says Brad Hayes, lead appraiser for Peoples Company, Clive, Iowa. In addition, there are numerous investors and individuals with 1031 exchange funds who are active participants at land auctions, he explains.
Hayes and his team at Peoples focus on agricultural real estate valuations throughout the Midwest. They monitor land sale prices on a weekly basis, as well as the number of farms that are publicly for sale in Iowa at any given time. Out of those, they extract farms that have sold and have 85% tillable acres or greater.
“This data set allows us to home in on land value trends for highly tillable, row-crop production farms,” says Hayes. “According to this data set, it appears that land values bottomed out in the first quarter of 2016 and have seen an upward trend through 2017.”
Compare Land With Investments
One way to examine the current farmland market is to compare it with alternative investment opportunities, says Bruce Sherrick, ag economist at the University of Illinois.
The graph above shows the implied cap rates for farmland in Illinois, Indiana, and Iowa along with the 10-year constant maturity Treasury yield. As the cap rate declines, you pay more per dollar for future income.
A Look Back
The only period in history when there appears to be a substantial deviation in that relationship occurs in the years leading up to the 1980s Farm Crisis.
Land values were substantially above their fundamental values in the early 1980s, says Sherrick.
“It is also interesting to note that near the end of the period shown, farmland values were actually slightly conservative relative to the capitalized value of recent rents,” he says.
Land Prices Will Make Sense Soon
It appears that the land market reflects an expectation of slightly higher longer term income, or continued moderate cap rates, says Sherrick. This could lead actual land prices to recover somewhat. “In either case, land markets still make sense,” he says.
In Iowa, the inventory for highly tillable tracts available for purchase is historically low, and land values for tillable row-crop farms have trended upward from 2016 through 2017, says Hayes. “We look forward to seeing if and how the land market fluctuates in 2018.”
Notable Land Sales
- Guthrie County, Iowa: $14,100 per acre on 9/22/17 (208 acres)
- Wabash County, Indiana: $10,750 per acre on 10/16/17 (60 acres)
- Auglaize County, Ohio: $8,203 per acre on 9/28/17 (418 acres)
- McClain County, Oklahoma: $6,100 per acre on 6/21/17 (128 acres)
- Adams, Washington, and Weld Counties, Colorado: $1,161 per acre on 10/19/17 (735 acres)