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Land rent auctions 'stunning'

Murray Wise spent most of his day Monday trying to figure out how he'd handle it.

"I was stunned when I saw this," he says.

The farm land broker and manager said it all started when he saw a copy of the sale bill from a series of farm land rent auctions held around Iowa between Thursday, February 2, and Saturday, February 4. It was the first time he'd seen such an auction, and the type of sale that could change the makeup of the farm land value spectrum from now on.

"It's just a puzzling set of circumstances," says Wise, president of Champaign, Illinois-based Murray Wise Associates, LLC. "The question I would now pose is are these rents economically feasible from the farmer's point of view?"

The rents he's talking about came from the 4 auctions -- attended by hundreds of farmers -- in Guthrie Center, Eldora, Osage and Mason City, Iowa, over the weekend. At stake were 2-year leases on around 3,300 acres of land owned by Charles Lakin of Milford, Iowa. The land, sold in 24 different tracts, was rented for anywhere between $325 and $530/acre.

"The people who owned the land wanted to get fair market price, and this way, everybody had a fair shot," says Jim Hughes of Jim Hughes Real Estate, who conducted the auction in Mason City, Iowa, where he says there were around 350 in attendance. "The auction is no different than a land sale auction, only it's a cash rent auction. It's really a pretty fair way of doing it for the landlord."

Included in the deal on each parcel of land was reimbursement for any tillage and fertilizer taken care of last fall. Those expenses, as well as 25% of the total rental price, were due the day of the sale, with the remainder due on March 1. But those upfront obligations for the winning bidders weren't much of a hindrance during the sale, Hughes says, especially considering some had previously been farming the land for a quarter century, Hughes adds.

Land rental auctions like this are a new concept in the farm real estate sector; Hughes says this is the second he's conducted, the first being in Glenwood, Iowa, a few months ago, when the winning bidders paid $465 and $480/acre/year on 2-year leases.

'A new paradigm'

These recent auctions set a new precedent for both the price fetched and the way it was reached. Some say the former is troubling, but the latter makes the land market a more level playing field. First, based just on the amount fetched for each piece of land, Wise says it shows the recent sharp run-up in land values may not be an anomaly.

"I think if nothing else, it's going to validate the current high sales we've seen in the Midwest. At these kinds of rents, particularly from an institutional buyer's point of view, it now works," he says. "This certainly sets a new bar. These values set a new paradigm."

But even though the prices fetched at the rent auction may make sense from today's new land value standpoint, the way those prices were reached have a lot to do with the amount of the final bid, Wise says. And, that's where these auctions set a new precedent. In an auction setting, a $500/acre rental rate is likely a lot easier to reach than in a private meeting between landowner and tenant.

"I'm not sure one privately would have the nerve to ask these prices, first and foremost, and yet the terms and conditions are equally staggering," Wise says of both the land and the stipulation that the winning bidder pay for last fall's tillage and fertilizer. "Those are tough rules, yet the seller still has the right to ask for that."

On the other hand, though, a live auction like the ones Hughes conducted open up the opportunity for all eligible farmers to be in the running to rent the land. That goes a ways to building a level playing field, says Farm Business Talk senior contributor BA Deere.

"These auctions do make sense. Land has always been locked into tight hands, never coming up for rent, shutting out a starting farmer," he says. "At least with an auction, if a young farmer can scrape up $80,000, he can rent a quarter and is in business. Auctions are the way to go; it turns the whole transaction into a business proposition of dollars and cents with no more fringe extras. All that bologna is out the window."

The future of land rent auctions

Hughes says he's definitely planning on more auctions like these in the future, especially with landowners who feel their lease arrangements aren't keeping up with land values. "People have contacted us and are talking about doing it now and even a year from now," he says.

Wise is a little less enthusiastic about the prospect of land rent auctions in the future. As a farm landowner himself, he says a top-dollar auction could hamper future business relationships.

"A partner and I own a farm in Mitchell County, Iowa, reasonably close to the 2 tracts they leased in this auction, and it's just a puzzling set of circumstances," Wise says. "My partner and I would not have the nerve to take the land to public auction."

But, as a farm real estate broker and manager, he admits as much as he personally doesn't like the idea, more auctions like these are probably inevitable.

"We have named 2 or 3 people who could come to us and want to lease their farms at public auction for 2013," Wise says. "We don't know yet. I don't visualize us going to cash rent auctions, but it is still interesting."

In the end, regardless of whether farmers deem it "fair" or not, the basic economics of a sharply higher-trending land market could drive the land rent auction trend.

"There could be some really interesting conversations between landlords and tenants," says Farm Business Talk veteran contributor kraft-t. "Don't blame the landlords. The market has been established."


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