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Iowa Land Values Have Hit Bottom, Moving Higher, Survey Says

Higher interest rates and falling net income to cap increases.

AMES, Iowa— The value of Iowa farmland is seen as bottoming out and making gradual moves higher, according to survey results released Wednesday.

Those attending Iowa State University’s annual Soil Management Land Valuation Conference (SMLV) see a flat to slight decline in values short term, but rising values in the long term.

Since 1964, participants at this conference have been forecasting land markets six months, 18 months, two years, five years, and 20 years later.

The survey shows that 170 farm managers, appraisers, land brokers, and ag lenders put more weight on the short-term and medium-term forecasts, according to Wendong Zhang, ISU conference chair.

“What we are seeing in the survey results is a short-term dip in the next six months, followed by a stabilization in the land markets for the next two years,” Zhang told Successful Farming at Agriculture.com.

Specifically, land values are seen declining from now until November 2018 by 1%.

“After that time period, land prices are seen flat to rising,” Zhang says.

He adds, “I wouldn’t read too much into a 1% dip or 1% rise. Instead, the more telling story is that the survey indicates a stabilizing land market.”

Trade Uncertainty

The decline in land values may be a result of the continued U.S. agricultural trade uncertainty, which could affect farm net income, Zhang says.

“Also, the USDA forecast of the 2018 net farm income of 6.7% decline. And that is expected even before the issues of trade disputes with China.”

In addition, as the Federal Reserve indicates more increases in the interest rates this year, this would put even more pressure on land values.

Long-Term Optimism

The survey participants believe improvements in land prices and rising corn and soybean prices.

So, the survey asked participants to forecast commodity cash prices, as far out as 2020.

“Corn prices are seen increasing to between $3.50 and $4.00, while soybean prices are seen ranging between $9.54 and $10.12 per bushel,” Zhang says.

So, the higher crop prices would translate into stable to improved farm income.

He adds, “The survey participants are saying that after being in the realm of low margins for so long, we are about to climb out of this mean cycle. At the same time, no one is seeing a return to the golden years of the late 2000s.”

Looking out even further, Iowa land values are seen increasing by 16% between now and 2025, and 57% between now and 2040.

Capital Rate Trends

The ISU SMLV survey shows that cash rents are expected to remain stable.

“So, whatever amount the land market grows, cash rents will grow along with it, according to these survey participants,” Zhang says. When the land market declines, cash rent will decline. And the rent-to-land value ratio will be compared with the interest rate movement.”

This year’s SMLV survey indicates a 3.0% rent-to-land value ratio.

To calculate the ratio, gross cash rent is divided by land value estimate.

Though some folks involved in agriculture believe that cash rents drive land prices, it doesn’t necessarily ring true for all parts of the state, Zhang says.

“The formula I like to focus on is land value equals net income divided by interest rates,” Zhang says.

If you are renting out the land, then cash rent is your income. If you cropshare, then yields become part of your income.

Furthermore, it’s more than cash rent for northeast Iowa farmers who have land values that can be set on livestock returns,” Zhang says.

Land Value Pressure

With the expected Fed interest rate increases and the drop in farm net income, the recent land value uptrend may be a head fake, Zhang says.

“With these things in mind, I’m not sure if the recent bump in land prices being reported at sales is a sure sign of the market,” Zhang says. “The economic fundamentals are suggesting otherwise.”

Land Value Stabilizers

There are some signs supporting the idea of land value stabilization, he says.

“This summer we will release a five-year study on land ownership. It appears that 82% of Iowa land is fully paid for. That number keeps going up slightly,” Zhang says.

What that says is that some farmers have been able to save up money so they have the capacity to buy, Zhang says.

“In addition, with this high ownership percentage, landowners don’t necessarily feel the urge to sell the land, which exacerbates the limited land supply factor, keeping a floor under prices,” Zhang says.

 

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