This Is Why Farmland Prices Really Won’t Come Down

Jan 14, 2018

The Future of Farmland Prices

Why won’t farmland prices come down to more closely match the land’s ability to create income?  This was the subject of a post I came across on Facebook last evening.  Iowa Farmland Appraiser Jim Rothermich posted a link to an article on AgWeek titled “Why don’t land values match commodity prices more closely”  As you can imagine this is something that’s been a topic of discussion lately as farmland prices stay stubbornly high in this current downturn but decisions for purchasing farmland are not based solely on its ability to create income.  The article ended with the conclusion that farmland prices remained high and that “it appears to be something different than just a simple supply and demand relationship.”

 

The conclusion is correct and while I suspect the author likely had a deeper knowledge of why I am going to pick up where he left off.  First the standard 1031 answer presented in the article is barely a part of the equation.  1031 is still alive and well but in 2018 1031 buyers at farmland auctions are really more of a rarity.  There isn’t much volume trading hands and a farmland 1031 is a risky proposition right now because of the trade deadlines imposed by law.  Its so ingrained in recent memory because of all the 1031 activity 2011 through 2015 that it often gets blamed for todays higher farmland prices.  The answer isn’t that simple, it can’t be nailed down to just one particular issue or one reason.  For many cases its a combination of factors but at times it may be just one specific reason.
As an auctioneer and land broker that deals with this stuff daily, its my opinion the money just hasn’t dried up and farmland remains an exceptional investment that offers a unique advantage over other investments.  Land provides an annual income, appreciates in price over time, certain tax advantages, recreational benefits, borrowing power and financial security, additional capacity, manure disposal and other things that can’t always be measured strictly on an income/expense or cash flow calculation.  Farmland is a place thats easy to park large sums of money and hold it until you need the money for something else, its a huge savings account with excellent benefits you don’t get from other investments and its low risk on a hard asset.

farmland prices in iowa over time

There is no rule that commodity prices dictate farmland prices but generally its a rule that something value is commensurate with its ability to create income or future appreciation. With the crop cycle as it is land values, cash rents and commodity prices will always be out of step. This was true when farmland prices were going up post 2010-11 and is true today on the way down. I have many examples but I very specifically recall selling a farm in Shelby County, Iowa in 2011 for $9000 an acre that the renter was paying cash rent of $90 per acre.  The very next farm I sold was in Marion County Iowa for $6200 and the renter was paying $75 per acre rent and had been since about 1980.  Many of the farms I sold during that time were more out of step than we are today and I could tell stories of many others as well.  
It takes several years of persistent low prices to create the pressure thats needed to really affect prices much. In relation to the entire state of Iowa, very little farmland has sold in the last 2 years. If you imagine all the money available versus what was actually spent its not hard to see there is still more money out there today. Its also true that there are fewer repeat buyers than people imagine. Some people believe there are only a few people or evil corporations just gobbling up all the farmland that becomes available when thats just not true.  More often that not farms I sell are being sold to someone that hasn’t bought a farm in a decade a more. There are still a lot of those people left out there wanting to buy a farm, waiting for the right farm to come up. There were a lot of people that sat on the sidelines 2012 to 2018 waiting for the right deal that are today finally pulling the trigger using a lot of that saved money.
This conversation wouldn’t be complete without talking a little bit about rental rates which are one of the legs of the stool that hold farmland prices up.  When you look in the mindset of a farmer you see that in the first few years of low prices they are more likely to try to hold on and burn up reserves in hopes that things turn back in the right direction.  They do this because when they give up a farm they won’t get it back when things improve. They can not tell a landlord “well I don’t want to rent this farm this year but when things improve I’ll come back and rent it then”  Life doesn’t work that way.  It’s a fact thats in their minds while negotiating cash rents every year.  I know farmers from all over the Midwest and many of them, they genuinely want to keep their landlords happy and share in the rewards and it makes more sense for them to negotiate in small increments. The smartest financial managers had a strategy coming out of 2014 to step down their rents over a 4-6 year period and planned ahead for that.  It was easier on them and the landlord that way.  
what does farmland in iowa sell forLets talk about history.  I’ve sold over 300 farms in my life.  I’ve sat and talked to some of the best and the brightest people that have ever owned dirt.  Buying land often doesn’t make sense the day you buy it nor is it about that day. Buying and owning land is in many cases a multi-generational investment or legacy investment.  We can look back to the Ag Boom of the 1970’s today and see just how cheap land was even at the peak of that super cycle.  No doubt the interest rates of that period combined with high farmland prices sank a lot of farmers but dollar for dollar, if we could buy at those numbers today we’d be elated at it!  In 1975 you could buy an average acre of farmland in Iowa for $1095 and in 2017 that price was $7326 per acre.   We have a list of the historical farmland prices in Iowa county by county that you can look through.
 
Today people envy those that own farmland and especially those that have large holdings.  Something that is no different today than it was back in 1975 is that when people were walking out of auctions in those days people thought they paid to much.  Today a lot of those farms are selling some 40 years later often by heirs and the same things are said, they paid to much. Why would history change?  If you buy farmland today for the average $7326 an acre you’ll look back in 40 years and think it was a steal. It will look cheap and the farmers across the countryside know that because they think long term and today they have access to money at much lower interest rates than was prevalent in the 1980’s.
Finally.. people always ask me how somebody can pay those prices for land and still make it go.  Farmers are financially smart people.  They don’t go to work and get a paycheck handed to them weekly and many have the benefit of multiple generations of knowledge in building their operation.  They have to know how to manage money not only for today but for the long term future of their family and operation.  As I said above often times its a first purchase in a decade or better, some purchase more often and that makes sense when you can cost average that into an operation against other owned acres, a livestock operation or other private business venture. When you look at history and set aside the notion of revenue per acre and dig a little deeper it makes sense that farmland prices will be slower to come down.   We keep hearing about this impending crash of farmland prices and so far after hearing about it for years its still never played out.  I think the truth is that we’ll just continue to creep slowly for the time being.  It will keep everybody guessing and one day it will pass and it will all look different.  If you are looking to the future and keep passing farms because you think it will crash and you’ll get to gobble up lots of farmland at cheap prices I have serious doubts you’ll ever achieve that.  
Jason J Smith

Jason J Smith

Auctioneer & Land Broker

Jason is an experienced farmland broker and auctioneer with extensive experience in farmland sales across this Midwest.  Jason has worked with hundreds of clients to create advantageous outcomes.  If you are selling land schedule a consultation with Jason by calling or using the calendar.

Phone: 515-537-6633

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