"Going forward, the question is: How fast and how far will land values decline?" Andy Swenson, North Dakota State University Extension Service farm management specialist, said in a statement.
According to a North Dakota Department of Trust Lands study, North Dakota average cropland values declined about 4 percent in 2015. A report by the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers found the decline to be greater — 9 percent in 2015. Swenson expects land values to drop by another 5 to 10 percent in 2016.
The declines come on the heels of an 11-year streak of value increases averaging 15 percent annually.
Only one region of the state saw an increase. From January 2015 through January 2016, land values in the northwest rose 13 percent to $1,185. Swenson said crops, like durum, peas and lentils, typically grown in the region were more profitable than other crops in 2015.
Northwest landowners also did not see the same level of value increases previously as those in other regions. From 2004 to 2014, land values increased about 300 percent for all regions but the northwest, whose land value increased only 170 percent.
Central North Dakota, the northern Red River Valley and southwest North Dakota land values stayed about the same. The southeast and northeast regions’ values dropped 4 and 8 percent. The southern Red River Valley declined 12 percent.
“Declining values of land reduce the borrowing capacity of the landowning farmer,” Swenson said. “This could be a serious problem if a farm needs to borrow money to cash flow.”
While lower land values make the purchasing price more attractive to potential buyers, “lower crop prices and farm incomes have dampened the financial ability and enthusiasm of farmers for purchasing land,” Swenson said.
Several regions had a decline in cropland cash rental rates but the decline of rents is happening at a much slower rate than the land value declines. The largest decline was in south central North Dakota, down 11.6 percent to $56.90 per acre.
The last significant period of decline in land values was from 1981 to 1987, when values dropped 40 percent. It took 24 years for prices get back to the 1981 level.
Costs of production more than doubled from 2004 to 2014. When prices dropped by one-third for wheat and soybeans and one-half for corn, the impact on profit was severe Swenson said. And the average net farm income is expected to be at a 17-year low, according to a survey of farms enrolled in the North Dakota Farm Business Management Education program.
Swenson said 2016 will be a critical year for farm finances and land values. Crop profitability for 2016 is very poor and mediocre to slightly poor yields could create a farm financial crises.