How Fragile is the Farmland Market?
October 25, 2018
As we enter the fall land selling season in many parts of the country, news headlines abound about downturns in commodity prices, trade wars, concerns over farm financial conditions, and rising interest rates, suggesting that the scales could tip at any moment on land values. Given this, how do we best make sense of the current farmland market?
Well, we need to pay attention to two things: (1) the fundamentals influencing the land market, and (2) your farm’s neighborhood.
Understanding the Fundamentals
1. Interest rates are at historic lows. Though they have been increasing since the summer of 2016, interest rates are still low by historical standards. Though the cost of borrowing money has certainly inched up, there are fewer alternative investments that offer similar returns to farmland. As a result, interest in purchasing/owning farmland as an investment remains robust.
2. Farmers continue to buy strategically. Prior to the decline in net farm incomes that has occurred since 2014, farmers who understood the cyclical nature of ag (and were financially disciplined) accumulated significant cash reserves. As a result, when a parcel that’s ideally located in close proximity to their current operation comes up for sale, they are in a financial position to purchase it.
3. Commodity prices may or may not have reached a new normal. Prices certainly drifted downward this summer and soybeans are center stage in our tariff and trade wars. But will these lower prices be a short or long-term phenomenon? If trade issues extend into 2019 and beyond, and especially if they result in key structural changes in the global market (e.g., China expanding its purchase of soybeans from Brazil), there may be future downward pressure on farmland values. And the projected record corn yield for 2018, if realized, will also add to downward price pressure. But the end result of these grain price shifts is still to be determined, and the results for the land market due to this uncertainty is—at least thus far—still undetermined.
4. There’s limited supply on the market. We know that the turnover rate for farmland is below 1% (Illinois as an example). Couple this with the fact that very little land transfers between unrelated parties or reaches the open market—and that farmland continues to be viewed as a long-term (versus short-term) investment—and the end result is that demand continues to exceed available supply, which continues to stabilize farmland prices.
5. Good farms are always in demand. On average, USDA-NASS suggests that U.S. cropland values averaged $4,130 per acre in 2018, an increase in $40 per acre from 2017. However, these averages mask regional variations as well as variations based on overall land quality. In many neighborhoods, top quality farms continue to bring high (or even record) per acre prices particularly when sold via an open, competitive, and well-managed public auction. A property may only be sold once during a lifetime, and local market players are not apt to miss an acquisition opportunity for a good quality farm. However, poorer quality farms are bringing significantly lower prices, or may not sell at any price.
Understanding the Neighborhood
Despite the overall trends in the factors listed above, the farmland market is neighborhood dependent. It’s certainly important to understand the fundamental trends above, but having answers (ideally supported by data) to the following questions is equally critical if you are planning to buy, sell, or rent.
1. Is my farm located in a “good” neighborhood? Farmland is more attractive/valuable if situated in a neighborhood characterized by wealthier farmers, good weather patterns, more productive soils, and a lower supply of farms on the market. AcreValue can help answer this question with our farmland data analytics. For example, Hardin County, Iowa has an average CSR2 (Corn Suitability Rating, a measure of soil productivity) of 80 and estimated average land value of $8,397.
Iowa as a whole, has an average CSR2 of 69 and estimated value of $7,166. Relatively speaking then, Hardin County is above average.
2. Is my farm more attractive than others? How does my farm compare to others in the neighborhood – is it less, more, or equally attractive to other properties? Consider the AcreValue report shown below. This particular farm’s average Productivity Index (PI) is 137.3 and it’s estimated value is $7,567—significantly higher than the county averages of 115.2 and $6,733, respectively. These numbers suggest that the property is a relatively good farm which could be in demand.
In summary, farmland values in most areas are holding strong, and real estate values continue to be influenced by a number of factors. Big data, keeping abreast of the latest land and economic news, and consultation with land professionals (e.g., your ag lender, real estate broker, or appraiser) can help landowners understand the market.
To explore farmland values in Iowa, Illinois, Indiana, Ohio, Nebraska, Minnesota, Wisconsin, Michigan and California’s Central Valley, visit AcreValue.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
– Franklin D. Roosevelt
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