Where are land values headed?

The average value of Iowa farmland is projected to be $8,568 per acre on Nov. 1, according to a survey of 130 farm managers, appraisers, real estate brokers, bankers and other experts in the land market. That’s just 2% lower than the record high of $8,716 set in November 2013, as reported by Iowa State University in its annual Iowa Land Values Survey.

Where are land values headed?

The average value of Iowa farmland is projected to be $8,568 per acre on Nov. 1, according to a survey of 130 farm managers, appraisers, real estate brokers, bankers and other experts in the land market. That’s just 2% lower than the record high of $8,716 set in November 2013, as reported by Iowa State University in its annual Iowa Land Values Survey.

“This is a good midyear check on what people in the business think is happening to the land market,” says Mike Duffy, retired ISU economics professor and Extension farm management economist who conducted the May projections survey and has conducted the annual Iowa Land Values Survey for 28 years. The Soil Management and Land Valuation Conference, the longest-running conference at ISU, has included this projections survey as part of its format for 50 years.

“As we look at the numbers for the past few years, we can see that the experts view the market as slowing down and maybe even reversing a little,” Duffy comments. “This shows the land market is still fluctuating, and people should be a little more cautious when they see some of the very high prices. Income projections just don’t support more big increases in land values like we have seen the past two years.”

The chart below shows the average projections for land values six and 18 months out from May 2014, as well as long-term guesses in 10 and 25 years. The highest values are projected to be in the northwest quadrant, with the northeast not far behind. The average value of farmland on Nov. 1, 2014, is predicted to be $10,241 per acre in northwest Iowa and $9,150 per acre in northeast Iowa. By comparison, the prediction for southeast Iowa is $7,821 per acre, and for southwest Iowa, $7,059.

The highest Nov. 1 individual prediction was $14,000 in the northwest quadrant, while the lowest individual response was $3,000 in both southwest and southeast Iowa. Projecting out 18 months, the highest response for Nov. 1, 2015, was $14,500 in the northwest, while the lowest was $3,000 in southwest Iowa. Looking 15 years into the future, the statewide projections average $15,558 by November 2039. That may seem strong today; however, from the 2013 average of $8,716, it would require only an annual growth rate of 2.25%, considerably lower than the rate of change over the past 50 years. Since 1964, when the average was $291, the annual rate of change has been a positive 8.8%.

The predictions “make sense” to Richard Isaacson, owner of Agri-Management Services in Marion. “The northwest and northeast districts sell at a premium to other parts of Iowa. Historically, we have had higher land values in these areas with more livestock. This is still the case and shows the importance of livestock for a farm operation.”

Highly productive farms are continuing to sell well, adds Isaacson, an accredited farm manager and rural appraiser. “The pressure is on lesser-productive farms, especially with the corn price at $4 or less.”

Predictions on historical basis

Looking back over 25 years, with only three exceptions, the land experts have been very close with their six-month projections, with variances in single digits. Fifteen of those 25 years, in fact, the predictions were only zero to 3% off in either direction, and in 2011, the prediction was statistically zero percent off. The average, statewide six-month projection in May 2011 of where prices would be in November 2011 was $6,721 per acre, while the actual ISU estimate in November of that year was $6,708. “The six-month averages are pretty close, but there are some wide swings some years, particularly as the market makes changes,” Duffy observes. “The people in our survey tend to overestimate when things are going up and underestimate when they are going down. You can see how the optimism has waned a little in the past few years.”

The historical chart at right shows the experts’ predictions of land values in six months compared with the actual average released by ISU for the same period. The predictions were off the most in 1998-2000, when they missed the mark by double digits. When asked in May 1998-2000 what land values would be like in November of the corresponding year, their guesses were 10% to 14% too high. In 1998, the guess was $2,097 per acre, while the actual number was $1,801. In 1999, they predicted $1,994 per acre vs. the actual average of $1,781, and in 2000 they missed the mark by 10%, from a projection of $2,067 per acre to the actual number of $1,857. But from 2001 on, those participating in the projections survey had a good handle on market direction.

Overall, the market is presently in a plateau phase, says Brent Gloy, a Purdue University ag economist. “Maybe that plateau even has a little downward slope to it. The big unknown is interest rates. It seems apparent that farmland purchased at or near record highs may see significant declines in value.” Much like during the period when prices were rapidly increasing, buyers should carefully assess the long-term fundamentals for crop production costs and returns when considering farmland investments.

While most agree the lower-quality farmland market is under the most pressure, Isaacson doesn’t expect a near-term break across the board. Farmers have two factors going for them now that they didn’t have 30 years ago: low debt and low interest rates. “Many farmers have enough money in reserves to keep buying land,” Isaacson says. “Keep in mind, better-quality farms are still selling at $12,000 to $14,000 an acre. Many farmers are in a strong financial position due to favorable returns during the last four years. These record profits will probably support the land market for a longer time than most expect. Another supporting factor is the 4% to 5% long-term interest rates on farm mortgages.”

Leonard writes from Holstein.

He said it

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“The average annual percent change in Iowa land values over the last 50 years is 8.8%. It doesn’t surprise me when you consider the big increases we’ve seen in some years, and given there were only a few really big decreases. This average percent change is why land looks like a good investment.”

Mike Duffy,
retired ISU Extension economist

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This article published in the August, 2014 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2014.

Land Values

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