FARMLAND values have remained perhaps the most obvious indicator of the current era of agricultural prosperity.
As commodity prices reached record levels in recent years, farmers have paid record prices for ground, the most finite of necessary production inputs.
Now that commodity prices have fallen sharply, however, farmland values are expected to fall as well.
According to Iowa State University Extension economist Michael Duffy, farmland values in Iowa have increased more than 10% per year annually since 2004, except in 2009, when values actually decreased 2.2%. This sharp uptick has taken prices well beyond the nominal records set during the 1970s farm boom, when prices increased by 345% between 1972 and 1981.
Duffy recently compared current trends in farmland values to two previous land booms, including the 1970s. Referring to the "first golden era of agriculture," he also looked at land trends between 1900 and 1920, when values increased by an average of 7.8% per year and gained 33.5% in 1920 as post-World War I prosperity saw values reach a record $255 per acre, marking an increase of 480% in 19 years.
"These land booms have some aspects in common and some differences," Duffy explained. "One feature is that the booms were driven by increasing prices and returns."
During the second boom, agricultural exports were a key driver in escalating commodity prices. Corn prices in Iowa jumped from an average of $1.04/bu. in 1972 to an average of $2.58/bu. in 1974.
In both boom eras, exceptional farm incomes and an almost unbridled optimism for the future of agriculture fueled a continuing rise in land values, which Duffy said led to excessive debt and mortgages that eventually sparked a particularly unpleasant bust cycle.
"Land values dropped 73% from 1920 to 1933, and they dropped 63% from 1981 to 1986," he wrote in a recent analysis. "The decline in the 1920s was more severe and lasted longer due to the major depression in the entire economy that followed the initial depression in the agriculture sector."
Honing in on income — perhaps the largest single driver in escalating land values — Duffy found that net farm income in Iowa grew 340% from 2004 to 2012. At the same time, land values increased 265%, underscoring a "very direct correlation between farm income and farmland values" (Figure 1).
Most economists and market analysts have pointed to the drop in projected net farm income over the coming years as a sign that the current boom is ending and made some obvious comparisons to the farm crisis of the 1980s.
One key difference between the two previous bust cycles and today, Duffy cautioned, is that producers so far do not appear to have put themselves into a position where a downturn could be quite so devastating. For example, a 2012 study found that 78% of the farmland in Iowa was held absent any debt.
"The most important variable to watch is income," he concluded. "What happens to farm income will have a direct bearing on land values. I think some of the factors that created the busts we saw after the past two booms haven't been as strong this time."
According to agricultural lenders surveyed by Kansas State University and the Federal Reserve banks of Chicago, Ill.; Kansas City, Mo., and St. Louis, Mo., farmland values are cooling.
"Land values are expected to decrease in the long term," Allen Featherstone, interim department head and professor of agricultural economics at Kansas State, wrote in an analysis of the university's fall agricultural lender survey. "Interest rates are expected to increase, and the spread over cost of funds is expected to increase in the long term."
A quarterly lender survey released last month by the Kansas City Fed found that prices are still going up, but at a slower rate than in previous quarters. Cropland values in the Federal Reserve 10th District jumped 15-22% compared with the previous year, while similar surveys by the Chicago and St. Louis Fed banks saw increases of 14.0% and 9.1%, respectively (Figure 2).
In almost every case, those surveys found that on a quarterly basis, farmland values actually fell in the third quarter. In the case of the Chicago survey, for example, values were up only 1% compared with the prior quarter, and the St. Louis survey found a drop of 6% in the Federal Reserve Eighth District.
Even so, big-money farmland auctions are still happening on a regular basis, indicating that at least some farmer investors are still willing to spend their hard-earned cash on the one commodity they can't overproduce.
"Just when we felt we had seen a near-term top in the market, record land prices have been surpassed at several auctions this summer and fall," said Jim Farrell, president of agricultural real estate heavyweight Farmers National Co. "After the end of the year, the volume of sales did slow during the winter months, but the pace has increased again this fall to where we will host nearly 60 auctions just in November."
Indiana-based auction specialist Schrader National reported that a November auction sold 256 acres of Wisconsin farmland for an average of $9,252 per acre, following on the heels of 160 acres that sold for $9,343 per acre in Michigan and 732 acres that sold for $8,277 per acre in Lake County, Ind.
"Whether we've been in Wisconsin, Arkansas, Indiana or Ohio, we've consistently seen big crowds and intense competition for the properties we've offered in November," R.D. Schrader said. "We've seen it on farms of all sizes in a broad geographic area. Prices vary depending on the quality of soils, location and the percentage of tillable land, but the direction has continued upward."