Many agricultural experts and economists have been warning for the past few years that we could be headed for a significant correction in farm land values in the Midwest. Land value summaries showed that a reduction in average land values did occur in many regions of the U.S from 2014-16, including the Upper Midwest, before stabilizing in many areas in 2017 and early 2018. Land values have been under pressure in some areas in late 2018 and in 2019, due to reduced crop yields, the ongoing trade war with China, low commodity prices, and reduced farm profitability. However, overall land values have remained fairly stable due to relatively low long-term interest rates, a limited supply of land being offered for sale, and relatively strong buyer interest.
Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farm land sales. Iowa farm land values rose at an incredible pace from 2000 to 2013, with only one minor decline in 2009, before more significant declines of 8.9 percent in 2014, 3.9 percent in 2015, and 5.9 percent in 2016. This was the first time that the Iowa land value survey has shown three consecutive years of decline since the mid-1980’s. The 2017 Iowa Farmland Value Survey showed an increase of 2 percent, or $143 per acre, compared to a year earlier, before a slight decline of 0.8 percent or ($62) per acre in 2018, which was followed by an increase of $168 per acre or 2.3 percent in 2019. Overall, 2019 average farm land values in Iowa are still 14.7 percent below the peak average land value of $8,716 per acre in 2013.
The average 2019 land values increased in eight of the nine crop reporting districts in Iowa, as compared to 2018 average land values, while decreasing in only the Northeast District. The greatest increases were +5.9 and 5.5 percent in the East Central and Central districts, while the only decline was (2.9) percent in the Northeast district. The Northwest District reported the highest 2019 average land values in Iowa at $9,352 per acre. There continues to be a limited supply of available land for sale in some areas of the State.
Trends in farm land values in Southern Minnesota are probably fairly close to the trends shown in the Iowa land value survey, reflecting the lower crop prices and tighter profit margins in recent years. Similar to Iowa, land values in many portions of Southern Minnesota seemed to stabilize in 2017, before declining slightly in 2018 and 2019. In addition to low profit margins, 2018 and 2019 crop yields have been the poorest in several years for many farm operators, due to the excessive rainfall and poor growing conditions during the past two growing seasons. Some isolated land sales across Southern Minnesota have still been reported at fairly high values per acre; however, the overall land value trend in the past 4-5 years has been a decline of 10-20 percent from the peak land values in 2013 and early 2014. In the past couple of years, there has been an increasing gap in the average land price for high quality, well-drained farm land, compared to low quality, poorly drained land.
One of the best sources of farm real estate values in Minnesota is the University of Minnesota’s “Land Economics” web site at: www.landeconomics.umn.edu. This web site is updated annually after September 30, and accesses a data base of various land values, based on farm land valuations reported to the State Revenue Office by County Assessors Offices throughout the State each year, which are adjusted annually based on actual land sales in a given County. This web site allows for selected sorts by County, State Economic Regions, Watersheds, etc., as well as by types of land.
Based on potential returns from crop production, current land values should probably be much lower than current levels. In recent years, many farm operators have purchased farm land as an “opportunity investment”, using returns from existing farm land that is “debt-free” to help subsidize the cash flow and debt payment ability on the newly purchased farm land. Similarly, investors have purchased farm land as a long-term investment, accepting current cash rental rates as a desirable annual rate of return.
Most economists point to the relative stability in farm land values in the Midwest as the primary reason that we have not seen more farm operations discontinuing due to financial collapse or bankruptcies. However, the continuing low profit margins in crop production, as well as in most of the livestock sectors, in the past couple of years is increasing the financial stress for many farm operations. The value of farm land accounts for over 80 percent of the total assets in the U.S. agriculture industry. During the farm financial crisis of the 1980’s, average farm land values declined by over 60% in a 5-year period from 1981 to 1986, which lead to many farm bankruptcies and foreclosures.
Currently, there are no signs on the horizon of a dramatic decline in land values, similar to the mid-1980’s. However, there are some lingering “caution flags” that could put further downward pressure on land values in the coming 12-18 months. These potential challenges include:
Continued low or negative profitability in crop and livestock farming.
Lack of increased exports from the new trade agreements, which could keep commodity prices reduced.
Economic challenges arising from the rapidly spreading coronavirus (COVID 19).
Changes in Federal estate taxes, capital gains taxes, or 1031-exchange policies.
Reduced interest to purchase farm land, or a rapid increase in the amount of land being offered for sale.
Lack of confidence in the land market by investors and ag lenders.
Many areas of the Upper Midwest experienced above average corn and soybean yields in 2016 and 2017, which seemed to stabilize land values in many locations of the region in 2017 and early 2018. However, greatly reduced crop yields in many portions of Southern Minnesota, Northern Iowa, and Eastern North and South Dakota in both 2018 and 2019, together with continued low commodity prices, appears to be putting more downward pressure on land values in some locations.
Most likely, the future trends in crop prices, along with the level of 2020 crop yields and profitability in livestock production, will determine if land values stabilize, or if we see further declines in land values later this year. The recent decline in long-term interest rates to finance land purchases should help bolster the stability of land prices in the coming months. We are likely to continue to see considerable variation in land values going forward, based on location, land quality, amount of tile drainage, and local buyer interest.
Kent Thiesse is a farm management analyst and senior vice president at MinnStar Bank, Lake Crystal, Minn.