FARMLAND prices have been on an upward climb for several years, fueled by the red-hot commodity "super cycle" that drove corn from $2/bu. not so many years ago to record highs in 2012.
While land values are still holding near the high-water mark, recent trends indicate that the rate of growth has slowed considerably (Figure 1), and the cooling grain market could foretell a softer land market to come.
"They're not making any more land," farmers are often heard saying, perhaps as justification for paying double, triple or more for a piece of ground versus even 10 years ago. Prices for good farmland — and even for marginal ground — have shown double-digit increases for several years in most regions of the country.
Recent surveys from the University of Missouri and the Federal Reserve Bank of St. Louis suggest that buyers are paying close attention to the shifting headwinds in agriculture and are easing up at land sales and auctions.
"A lot of our respondents think we may be, at least short term, nearing a peak in Missouri farmland values," said University of Missouri economist Ron Plain. "They indicated that they thought cropland would increase between 2% and 3% in the coming year, pastureland between 1% and 2% and other land about 1%."
That is significantly different from the 17% increase the survey found from July 2012 to July 2013. Plain said cropland values in the state averaged $4,510 per acre, while good pastureland prices had increased 12%, with a statewide average of $2,492 per acre.
The run-up in land prices has led many farmers and lenders to recall the steep increase in land values observed in the late 1970s and early 1980s that turned out to be a precursor to the farm crisis of the 1980s (Figure 2). Most economists don't see the current trend as a direct parallel, but continue to watch farmers' balance sheets closely for signs of potential weakness and impending calamity.
Plain's findings were similar to a quarterly survey conducted by the Federal Reserve Bank of St. Louis that found that farmland values in the Eighth Federal Reserve District gained more than 20% from last year to reach an average of $5,672 per acre as of the second quarter. Ranch and pasture prices were up only 1% from the second quarter of 2012, reflecting the challenging conditions of grazing cattle during a significant drought event.
Lenders surveyed by the bank expect land values to continue to rise in the second half of the year and for pastureland prices to rise at a significantly slower rate than cropland prices. Respondents are definitely expecting less farm income ahead, however, due to the rapidly shifting fortunes of the grain trade as corn and soybean production improves and prices fall from recent highs.
Forecasting land values is challenging, but past trends confirm that, generally speaking, what goes up must come down.
Iowa State University economist Michael Duffy examined agricultural land trends over the past 170 years and found a fairly consistent rate of increase (roughly 4% annually), with a few notable periods of significant acceleration.
"There are three periods where the land values increased substantially, and in two of the three, these rapid increases were followed by significant decreases," he explained.
The first of those three "golden eras" occurred in the 1910-20 and coincided with World War I and westward expansion in the U.S. Land values increased 137% in Iowa during the decade and 73% across the country.
Over the following decade, however, prices dropped by 71% in Iowa and 54% across the U.S.
A second major land boom occurred in the 1970s, when prices escalated by 369% in Iowa and 263% across the country. The massive expansion of U.S. grain exports and the opening of markets for several U.S. commodities, along with hefty inflation following the Vietnam War, helped fuel this second golden era.
The bust of the 1980s saw U.S. land values fall 27%, and Iowa land values fell 58%.
Presently, U.S. land values have grown 130% since 2001, including a 20% jump between 2010 and 2012, based on U.S. Department of Agriculture data.
Duffy said the one constant in each case is that farm income is the key driver of land values, especially gross income.
During the first and the current farmland "booms," farm income and land values increased in a fairly similar range (Figure 1), but in the 1970s, the rate of increase in farmland values far outpaced the growth in gross cash income, and net income actually fell by the end of the boom.
Duffy said one thing is clear: Land values will almost certainly fall at some point, particularly as commodity prices — and farm incomes — come back down. What is far less clear, however, is how quickly they will fall and how well farmers and lenders will be positioned when the values invariably do come back to "normal."