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'Spite effect' drives crazy land sales

The continued spike in farm land values continues to be a huge story for corn and soybean farmers in the Midwest. But, are all these eye-popping land sale numbers really good indicators of where the land market sits right now?

There's a lot that goes into each farm land auction. Emotions can run high. And, if a farmer's got another reason to bid up a piece of ground -- like if it's adjacent to existing acres or if there's some kind of emotional tie -- the sky can be the limit, as shown by a land sale in northwestern Iowa earlier this winter where the winning bidder paid $20,000/acre. It's not always a matter of dollars and cents.

"Such sales...and there are some...are very few," says Murray Wise, land real estate specialist and marketer with Murray Wise Associates LLC in Champaign, Illinois. "They’re statistical outliers, the exceptions that prove the rule."

Non-farm investors are typically thought of as the main drivers for sometimes irrational land sale prices. Wise says in his experience, the sales that net the most extreme prices aren't driven by investors.

"In examining some of these sales, I see some common denominators. The first commonality is a negative: There are no investors involved, only neighboring farmers," he says. "Then, they usually involve one of two situations:  Competition between what I will call 'un-fond' neighbors or livestock feeders."

The latter actually represents a major growing factor in a lot of land sales, especially in areas where there's a lot of livestock. New regulations on the application of livestock manure put an added premium on some farm land.

"Livestock feeders see double value in quality farmland because they need acres over which to spread their feedlot by-product," Wise says. "To remain in compliance with their EPA permits, they must have sufficient cropland to support their herd. This second utility makes the land more valuable to them than for the mere raising of crops. Their bids often reflect this enhanced value."

If you're entering into the bidding at a sale where you know there are some less-than-friendly neighboring farmers in the running, look out. Wise says that's typically a sign that the bidding could get a little out of hand.

"Neighbors who don’t like one another are occasionally subject to irrational bidding," he says. "You might call it the 'spite' effect."

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