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The Surprising Reason Land Values Remain Strong

Trend could change as investors burn through cash and more land hits the market.

Falling cash grain prices are resulting in lower farmland values in many Corn Belt states, but not as much as you might think.

Recent survey results indicate that average prices paid for average farmland in those states declined by 1% since January 1 in Illinois, and 1.7% from March to September in Iowa. The Illinois Society of Farm Managers and Rural Appraisers and Realtors Land Institute released survey results on August 29; the Realtors Land Institute unveiled its findings September 10.

According to the Federal Reserve Bank of Chicago, land values in Wisconsin in Indiana increased from April to July, 4% and 1%, respectively.

That farmland values aren’t in precipitous decline, given the lower value of corn and soybeans, seems peculiar, agrees Stephen Nicholson, senior analyst for grains and oil seeds at Rabobank, but the reason is simple: the law of supply and demand.

“There isn’t a lot of land for sale,” he explains. “There have beem more buyers than sellers, so land prices stay up.”

Certainly, there are fewer land auctions occurring throughout the Heartland, adds Troy Louwagie, real estate broker for Hertz Real Estate Services of Mount Vernon, Iowa. “There is very limited supply.”  

The ISFMRA notes a similar trend in Illinois. According to its survey, 48% of respondents indicate less farmland was sold during the first half of 2018 compared with the second half of 2017. The majority of survey respondents expect the trend of less farmland changing hands will continue through the remainder of 2018.

Nicholson adds that there are still farmers hanging onto cash. So, when land comes up for sale, those well-heeled farmers are in a position to buy. “There are farmers who have waited for this opportunity. They’ve kept their cash and have it in place for this opportunity,” he says.

A storm on the rise?

Strong land prices could give way soon as grain prices continue to fall.

In the Corn Belt, farmers have burned through cash while continuing to pay fairly high cash rental rates despite low cash grain prices. And, prices paid for seed, fertilizer, and crop protection products also have stayed high. Nicholson believes farmers are starting to feel the pain.

“I think we’re now in a situation where there is enough financial stress in the country that people either have to sell land and do something for their balance sheet, or farmers are getting out,” he says.

Why now instead of when prices began to slump in 2016?

Two years ago, balance sheets were strong due to several years of record farm income. “Even from 2014 to 2018, there were still opportunities to sell crops and make a profit,” Nicholson says.

From now through 2020, the profit potential is scarce, he adds.

“There has been pain, and people have been able to get through it. But now, its staring to change. We’re not seeing prices going to get a lot better anytime soon," he notes.

If this holds true, farmland values could erode at a quicker pace. 

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