Iowa land values up but plateauing -- survey

Iowa farmland values have reached an average record high price, though many signs point to the latest figures adding up to a plateau that will likely usher in an income-driven slide in the coming months and years.

Iowa farmland's worth an estimated $8,716/acre, a 5.1% increase over the same time a year ago, according to the latest Iowa Land Value Survey, the results of which were released Wednesday. Northwest Iowa saw the highest values, with Scott County hitting a $12,413/acre average price, more than 12% higher than a year ago, the highest year-over-year climb in the state. But, Scott County's in an area that, though containing some of the state's highest-value land, has already seen a slight decline from a year ago, according to Iowa State University (ISU) Extension farm management economist Mike Duffy, who conducts the biannual survey of land values.

"The Northwest Crop Reporting District reported the highest land values at $10,960, which was a decrease of $445 (3.9 percent) from 2012," according to an ISU report.

The record-high county land values despite a decline in overall values in the state's crop reporting districts is a sign of likely plateauing in the market, Duffy says. Whether that means it's due for a simple pause or an altogether correction lower remains to be seen.

"The 2013 land value survey shows a market in flux, with strong and weak price sales occurring at the same time," he says. "The key question is if this shows the market is going to settle, if it is just pausing before another takeoff in values, or if the market has peaked and due for a correction."


Graphic courtesy Iowa State University Extension

So, why are expectations bearish despite some record-high land values in the latest survey? Duffy says it's all about gross farm income, which is already seen sliding with declining grain market prices.

"With the pullback in commodity prices balance sheets are going to take a hit. Not only is the grain in the bin worth less but the value of the farmland is directly correlated to commodity prices," says Steve Bruere, president and owner of Peoples Company, a farmland brokerage company based in Clive, Iowa. "If corn stays in the $4 neighborhood, it’s going to be challenging to maintain current rental rates as bankers will start to pull in the reins on financing aggressive rents. Ultimately, this means lower land values."

These lower grain prices may not manifest themselves completely until all land lease and purchase terms, as well as crop insurance guarantees are nailed down in the first few months of 2014, but Duffy expects a downturn but not a complete collapse.

"Iowa corn and soybean price movements are good indicators of gross farm income movement. There was a 33% drop in the Iowa average corn price from October 2012 to October 2013 and there was an 11% drop in soybean prices over the same time period. The November estimated price for Iowa corn was 39% lower than the November 2012 price. Soybean prices were 11% lower," according to an ISU report. "The odds are against a major collapse in land values. But, if projections of a new lower level for commodity prices hold, we should expect land values to drop."

Adds Duffy: "Farm income is a strong indicator for the direction land values will go, but there are other factors as well. Interest rates remain low, but the percent of respondents who reported less sales than in 2012 was the highest it’s been since 1985."

The variability in land sale prices and volume echos what Duffy says about a market "in flux" that's moving toward a more bearish trend, Bruere says. But, that doesn't mean it's a clear-cut move quite yet.

"The land market is a bit toppy right now. We continue to see incredibly strong sales followed with a weak sale right behind it. There is plenty of capital in the marketplace chasing farmland, so if it’s the right deal, then prices continue to be strong," he says. "We just aren’t seeing consistently high prices like we did a year ago at this time."

Circumstances like these can make it tough to get a good hold on what local land values should be, and whether sale prices are indicative of the general value trend. That makes it now more important than ever to remember how managing land fits into your overall farm portfolio.

"It’s important to remember that land is a long term investment," Bruere says. "Given the current political environment and swings in commodity prices we could see some short term volatility but we need to remember that land is a long term investment."

Peoples Company will be hosting its 7th Land Investment Expo on January 24, 2014, in West Des Moines, Iowa. The gathering is expected to draw more than 600 ag lenders, farm managers and farm real estate specialists and brokers, but will likely take on an overall different tone than past events, Bruere says.

"The land market has been consistently higher since we have hosted the event. It’s been a fun event as everyone has been bullish, so it’s going to be interesting to see the reaction as we start to have some negative sentiment in the room," he says.

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