COVER STORY: Red River Valley-area real estate market looks for more stable footing

FARGO, N.D. -- Farmland. It was the clarion call to immigrants who settled the Red River Valley first broke sod in the late 1800s, and it's the basic building block for agriculture today.

FARGO, N.D. -- Farmland. It was the clarion call to immigrants who settled the Red River Valley first broke sod in the late 1800s, and it's the basic building block for agriculture today.

But how do farmers -- and other investors and absentee landowners -- view its value in an economy of rising input prices today? With a struggling stock market? With rising input costs and commodity prices that can be invaded -- and suddenly dropped -- by hedge funds?

Kevin Pifer is owner of Pifer's Auction Service, based in Moorhead, Minn. Pifer's has become a significant player in the land game in the region, especially as the high-demand period favored the auction mode of sales. Only eight years old, the company has 12 licensed Realtors and auctioneers and operates in all of North Dakota and the north half of South Dakota, as well as Minnesota and Montana.

Pifer says his company completed sales totaling 63,000 acres in 2008, up from 42,000 acres in 2007. Pifer's played an increasing role during the past two years, primarily in central and western North Dakota.

Another major player in Red River Valley ag real estate is Botsford & Qualey Land Co., based in West Fargo and Grand Forks, N.D. Brent Qualey, a broker and partner in the firm, says the amount of land on the market today may be 30 percent to 40 percent of what it was a year ago, but that was compared with historic highs.


"We were busting at the seams, selling land," he says.

Change in psychology

Qualey started in the land business in 1981. He's seen a wide range of ups and downs through the years.

"I would describe the market as being variable, but very localized," he says. "Some areas are every bit as strong as last year. Some areas are down."

Botsford & Qualey had had record years for the past four or five years.

"I would say the first quarter of this year -- if you compare it to the first quarter of last year -- I would say the land inventory on the market is substantially less," Qualey says. "That's changed from October and November through today. A lot off it is due to what I call a 'paralysis' among the sellers. People contemplating selling put the decision off."

He had a feeling a change was coming.

Qualey says he knew things had become irrational last spring when a young farmer at a sale told him he needed to buy land now.


"He said it would never get cheaper. It was an indication to me that the younger generation was going to learn that farmland is like any other market -- it goes up and down."

Conversely, Qualey says he knew things had turned the other way in mid-October when a business person came into his office. The client had planned to sell some farmland he'd owned for "quite some time" outside the valley.

"He came in and decided to do the paperwork to sell it but said he didn't want to move forward until the economic climate stabilized," Qualey says.

The deal still is on hold.

"He said, 'If we're not going to get this done at a price I want, I don't want to try,'" Qualey says.

Qualey says the company had a good fourth quarter, but not so many new listings.

Pifer says the psychology of the marketplace has clearly changed from last year, when a lot of land sold.

"People saw escalating land values, corresponding to the commodity prices," Pifer says. "I assume they made the same assumption that the rest of us did -- that land prices were going to go up and up, so let's sell into an 'up' market."


Even as commodity prices started sinking in the fourth quarter, some sellers wanted to go forward out of concern over changes in capital gains taxes.

There was no shortage of influences on the psyches of landowners -- commodity price collapse, fuel prices, presidential campaign, the stock market decline.

"Interest rates are a factor, but not a major factor," Pifer says. "With the presidential campaign, people are wondering what will happen to capital gains taxes. Some wanted to sell before we got into a new tax year, with a new president, a new Congress. Some wanted to sell before the bubble broke."

Larry O'Callaghan, who works with Pifer's and specializes in tax-related land swap deals (1031 and 721 tax deferred transactions) notes that many people who normally would be selling some land now are stopped -- "afraid whatever they do is going to be wrong, so they're not going to do anything."

Geographical truths

In the past several weeks, Agweek has looked at land value trends close to state lines in southwest Minnesota, eastern South Dakota and now eastern North Dakota.

When asked whether there are any differences within the Red River Valley and surrounding locales, Pifer answers this way:

"This is a strong and confident land market when you look at 'good to excellent' farmland. I can't emphasize that enough. You categorize that type of land and bring it to market -- there is not enough good land in inventory for sale right now."


This is a philosophy that seems to be embraced by everyone involved -- the farmer-buyer, investor-buyer, the farmer-investor and even lenders.

"It's 'Don't buy anything but good land,'" he says. Of special importance is that it is diversified -- can reliably grow corn, soybeans and small grains.

Qualey says that in the "sheer optimism" of early 2008, prices for marginal land were pulled up to where higher-quality land prices were.

"There was no differentiation between good and bad," he says. "Quality now matters again, and they're very much analyzing the productivity and drainage -- things that should impact a good piece of farmland."

Land in the "good-average" category isn't as attractive, Pifer says.

"On that, I'd say the prices have gone sideways, if not down 10 (percent) to 15 percent" since October, Pifer says. "And your poor-average land -- that's really dropped by 20 percent or so. That would include your recreational or hunting land -- that type of land."

He says the overriding philosophy is that production risks on marginal land are too hard to take in times of extreme market swings.

"And it costs just as much to plant an acre of corn on marginal land as it does on good land," Pifer says.


The way Pifer sees it, land prices historically have been driven by a combination of three major factors: commodity prices, interest rates and the productivity of the land. In the last half of 2007 and the first half of 2008, the only important factor seemed to be commodity prices.

"In fact, during that stretch, land was selling pretty much like a commodity," Pifer says. "People would buy it and they thought it was going to go up in value so much, kind of like a commodity," Pifer says. "People would buy it and they thought it was going to go up in value so much, kind of like a commodity."

Today, interest rates and productivity have re-established their roles as drivers of land values.

The productivity index for any piece of land, available through the Natural Resources Conservation Service.

If land has a value of "75" or greater, Pifer says that land probably is going to be in strong demand. Pifer -- predictably a believer and promoter of the auction concept -- says land of this high quality is a perfect candidate for the auction form of sales..

"I had a gentleman who had land that averaged '81' on the productivity index, and my recommendation was to sell it at auction," he says. "If it was a '61,' I would have advised him to price it and list it on the market."

A changing proposition

A year ago, Qualey says his company handled a deal in Pembina County, N.D., where a quarter brought $5,860 an acre in a bid sale. That turned out to be a high-water sale. There were sales attempted that sold in the low $4,000 area. It's tough to say what would have happened today, Qualey says.


Pifer's says his company handled 38 parcels land sales in the fourth quarter. All but one or two sold.

Some October sales in the Red River Valley area were surprisingly strong. Meanwhile, sales in the ranch country farther west had shown some weakness, possibly because cattle prices had come down before the grain price collapse.

One of Pifer's October sales in the Michigan, N.D., area, in the northern valley, exceeded his expectations by 10 percent to 20 percent. A sale a month later in the Devils Lake, N.D., area came in 5 percent less than projected.

In 2007, Pifer says some 60 percent of the purchasers of land handled by his company were farmers and 40 percent investors -- people buying land simply to hold it and sell it later at a profit, some through these tax deferral delas.

"We got to the fourth quarter of 2008 and it was more like 80 percent farmers, 20 percent investors," he says.

"I'd say the investors are still there, but there are fewer of them than before," O'Callaghan says. "So many of them are still shell-shocked (from the stock market collapse), waiting to see where things are going to level out before they make a decision to go forward."

O'Callaghan says it's too soon to say whether the Obama administration signals any changes in philosophy on tax laws, especially those involving the exchanges. Current policies largely have been in place or since 2001 and will go through Dec. 31, 2010, barring congressional change.

Pifer says that one kind of investor -- the hunter-investor -- generally is misunderstood by farmer-landowners.

"The myth is out in the country that the hunter-investor will pay any amount for land," Pifer says. "The hunter-investor may be willing to pay 10 (percent) to 20 percent more, especially if they have a tax exchange, which is a 15 percent deferral. But they typically look at their return on investment.

"A farmer might want a 5 (percent) to 6 percent return (on investment, annually). On hunting land, they may accept a 3 (percent) or 4 percent return, but they're not willing to just pay any amount."

Looking ahead

In the first quarter of 2009, Pifer's has about eight land-related sales booked. Generally, sales aren't booked until January to February for sales that start happening in March, so he's not concerned.

Qualey says the amount of listings are down from last year, but probably no more than 10 percent to 20 percent less than a typical year. He says things probably will rebound through the winter, particularly if grain markets recover.

"There are still numerous buyers out there for ag properties," Qualey says. "We sold a couple of pieces to people this fall who were looking to simply diversify their investments. The saying is land values can fluctuate, but the land is always there."

He says that land often can generate a 3 percent to 6 percent return-on-investment. Land -- "especially if a person can pay cash for it" -- sounds favorable compared with the so-called "safe" in things such as certificates of deposit or treasury bills.

He says the return-on-investment for marginal land can creep into the 6 percent to 8 percent range, but that comes with more risk. The faltering national economy has played a role in certain sales where an insurance company has been the financier, but he says there usually is credit available locally.

It's hard to say what will return the land market to a more aggressive stance.

"Part of it is getting past the holiday season, and into January," he says. "Grain markets increasing would help as well."

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