ISU survey: Iowa farmland values reach historic highs

Farm income bringing farm value up with it

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April 1, 2014 | 3:14 am

The value of an average acre of good Iowa farmland soared almost 24 percent from 2011 to $8,296, according to the Iowa State University's annual Iowa Land Value Survey conducted in November.

It marked the third year in a row that farmland values have increased more than 15 percent.

The increase is higher than results of other recent Iowa farmland value surveys. The Federal Reserve Bank of Chicago estimated that Iowa land values rose 18 percent from October 2011 to October 2012 and the Iowa Chapter of the Realtors Land Institute survey recorded a 7.7 percent increase from March to September 2012.

The average value of a good acre of Linn County farmland rose to $9,189 in November from $7,672 in November 2011. In Johnson County, the value of an average acre of good farmland edged up to $8,774 in November from $7,540 in the same month last year.

Mike Duffy, ISU economic professor and extension farm management economist who conducts the survey, said the results of the latest Iowa Land Survey are historic. Duffy said farmland values in northwestern Iowa topped $12,000 per acre, with O'Brian County recording an average $12,862 an acre.

"Better than expected crop yields and the level of land sale activity due to the proposed changes in land-related taxes contributed to the increasing values," Duffy said. "The Iowa State survey samples different populations, and uses different wording than the other surveys. This also could lead to different results especially in times of uncertainty.

"Even within the Iowa State survey there was considerable variation in the estimates."

Duffy said understanding some of the causes for the current increase in farmland values is helpful in determining why values continue to soar. He said farmland values are highly correlated with farm income, and as farm income increases, so will land values.

In 2005, corn prices averaged $1.94 per bushel in Iowa. The preliminary estimated price for November is $6.80 per bushel.

Soybean prices changed from $5.54 to $13.70 per bushel over the same period. Coming into this year, there was a general sentiment that prices would decline from their peaks. But, the drought kept that from happening by slashing yields and commodity prices remained at high levels.

Bill Davis, chief credit officer with Farm Credit Services of America in Omaha, said the large jumps in farmland prices also are driven by strong domestic and export demand for corn and soybeans, historically low interest rates, and very strong net farm income.

"We believe at least two of these three factors will reverse over the next three to five years,” Davis said. "The most likely event is a significant reduction in net farm profit levels as we see supplies respond to higher demand levels for commodities.

"Interest rates also are likely to increase eventually, making alternative investments more attractive than they have been recently. In short, over the long term farmers won’t be as profitable as they have been and that will affect the prices they are willing to pay for farmland."

Even if farmland prices do drop somewhat in the future, Davis believes most farmers are in a position to weather a moderate decline.

"Most buyers are farmers and they generally are in a very strong financial position," Davis said. "They have made these purchases with relatively modest financial leverage."

Almost three-fourths, 74 percent, of Iowa's farmland is owned without debt. That compares to the 62 percent of Iowa farmland that was debt free in 1982.

From 1982 to 2002, the amount of farmland bought on contract also declined significantly from 18 percent to 4 percent.

Lee Vermeer, vice president of real estate operations for Farmers National Co., said many farmers still have cash reserves from past years and that provides a very strong impetus to add land to their operations.

While Iowa has consistently recorded the largest increase in farmland values, other Midwestern states also have experienced higher land prices.

The latest Federal Reserve Bank of Chicago survey showed the average value of a good acre of Illinois farmland rose 15 percent from Oct. 1, 2011, to Oct. 1, 2012. Indiana farmland prices increased 11 percent, Michigan posted a 7 percent jump and Wisconsin farmland values rose 8 percent during the same period.

David Oppedahl, business economist with the Federal Reserve Bank of Chicago, said the high level of interest in farmland should persist due to sustained strong demand among nonfarm investors. Oppedahl said 31 percent of respondents to the October farmland values survey forecast greater demand to buy farmland among nonfarm investors over the next three to six months, while 17 percent anticipated lesser demand.

Oppedahl said farmers also are investing in land as a place to park excess earnings.

"They don't really need more capital for next year. They have enough operating lines to be able to handle their expenses for next year," he said. "Right now, with low interest rates and many of them being more than a little nervous about the stock market, buying farmland is a better option."

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