FNC Notes Equilibrium in Farmland Market

June 27, 2016 10:29 AM

Overall average values of crop ground and grasslands have slipped from the highs of several years ago, but are still historically strong, according to Farmers National Company (FNC), the nation's leading farm and ranch real estate company.

"The agricultural land market is in a time of equilibrium as the supply of land for sale is fairly in balance with the demand to buy land," says Randy Dickhut, senior vice president of real estate operations for FNC. "The supply of ag land for sale is generally on the low side of normal as some landowners are deciding whether to sell now or keep their land. Demand to buy land has trended lower over the past few years as buyers are being more cautious."

According to a survey of FNC agents, farmers and ranchers, who were the predominant purchasers of land that came on the market during the past decade, are not being as aggressive now when compared to recent years. Farm and ranch profits are down and lenders are being more careful in what they will lend on land purchases. Furthermore, investor interest in farm and ranch land declined as land values moved higher during the last four to five years and the return on investment slipped. But individual and fund investors are moving back into the land market as land prices soften.

FNC reports that, overall, demand for good land remains solid, but interest in lower quality crop ground and grassland is less in most areas.

"With the supply of land for sale being on the low side, the land market is stable at this time. But, factors affecting land values can surface over the next few years to move the land market in either direction," Dickhut said.

"If the supply of land for sale increases due to lower crop and livestock profits or landowners decide to sell now for various reasons, the land market equilibrium could change, pressuring land prices lower. Demand to buy land by farmers and ranchers will change with profitability forecasts," Dickhut continued." Changing macroeconomic factors affecting interest rates and alternative investments could change the demand for land either up or down. Besides economic considerations, there is always a reason to sell or buy that may end up being more important than where land values are at during any given time."

Michigan, Ohio, Indiana, Illinois, Missouri, Kentucky, Tennessee, Arkansas, Mississippi

Due to a swing in commodity prices, there has been a softening of the market in this region, says Roger Hayworth, area sales manager. The average prices paid per acre for high quality land in Michigan from June 2015 to June 2016 declined $100; in Ohio by $500; in Indiana by $500; in Illinois by $600; and Mississippi by $100. Missouri saw a slight uptick of $200 per acre and Tennessee saw $150; prices paid per acre in Kentucky and Arkansas remained steady from last June.

“There remained buyers with residual income from those high commodity price years with a continuous need for cropland acres, so the purchasing of land was led by their profitable years,” Hayworth notes. “Today, there remain buyers, but they’re cautious."

While commodity prices have had a significant impact on land values, location and quality remain major influencers on land values. “When higher quality farmland becomes available, it remains highly sought after and pricing remains pretty stable mostly, while we see mid- to lower-level quality land decline 3% to 8%, depending upon the specifics of the subject property, such as tiling, soils and any improvements made,” Hayworth says.

Iowa

The drop in commodity prices has caused land values to continue to soften in Iowa, observes Sam Kain, ALC, GRI, national sales manager for FNC based out of West Des Moines, Iowa. But, land values remain at a comparable level to June 2015, declining by $500 per acre on average for high quality land.

“The limited amount of land for sale right now has definitely limited the decline in land values,” Kain said. “Although we have seen a decline in all types of land, there is still strong demand for quality land and there appears to be renewed interest from investors. Farmland has always been a very stable investment, which is appealing to investors seeking a secure place to put their money. The majority of ag land sold in my work area has been to settle estates and still goes to farmer buyers though.”

Nebraska
While farmland prices set records in 2012-2013 and enjoyed double-digit increase in the past 10 years, 2016 has seen a plateau in farmland values. From June 2015 to June 2016, high quality land is selling for $1,500 less per acre on average.

“And they continue to tail off,” said JD Maxson, area sales manager, in North Platte, Neb. “This decline in farmland values in Nebraska denotes the first decline in recent years. It’s a result of a weak commodity market, soft cash rents and continued stress on livestock producers’ bottom line profit. Corn prices are at the lowest level in three years, affecting profit margins. Furthermore, as the demand for tillable cropland acres has dropped off, grazing pasture acres
paralleled this downward trend as ranchers and livestock producers became more prudent and cautious, Maxson said.

“Livestock producers experienced a record-setting cattle market in 2014 and throughout 2015, only to see cattle numbers increase (heifers to feedlots and not held back for breeding). Livestock producers (cow/calf and cattle on feed) have experienced a sharp decline in bottom line profitability, which has a direct impact on pastureland/grazing acres. With cattle numbers up, one would automatically expect additional pressure on grazing acres; however short line profits have seemingly depressed the pastureland market. Purchasing additional grazing acres, while realizing lower profits at market time, has had a direct reflection on prices paid per acre. Buyers are more cautious and have been forced to be more selective with their long-term farmland investments.”

However, Maxson noted that specific pockets of Nebraska farmland have seen land pricing steady to strong. For example, a March 24 land auction in Milford, Neb., for 260 acres in Seward County sold in three tracts for $10,500-10,700, proving high quality land with improvements like tiling, center pivot irrigation, abundant water and good access to grain markets is still in demand, he said.

On the flipped, dryland cropland is showing a stronger rate of decline, 15% to 25% location specific, compared to pivot and gravity irrigated cropland. Then in other areas of the state, cropland values vary with the biggest adjustments found in central and western Nebraska.

North Dakota, South Dakota, Minnesota

In the Northern Plains, a diverse region comprised of high quality, tillable farmland, grassland and recreational property, land values for high quality land continued to decline by $400 per acre average in North Dakota from June 2015 to June 2016, by $100 per acre average in South Dakota and by $900 average by acre in Minnesota.

“Land values continue to slide off their peak in North Dakota,” says Brian Mohr, area sales manager in Garrets, SD“In the majority of the Red River Valley, prices range between $4,000-$5,000 per acre for high quality land. This would be down 15% to 20% from 2014-2015. On marginal land outside the area, we are seeing steeper declines of 20% to 35% depending on how bad the flaws are on the land. Prices range between $1,500 -$2,500 for poorer quality land.”

Land values for top quality land in the southeast portion of South Dakota have remained stable from 2015 until now. Even recent auctions for land in this state have shown a slight increase. “Well attended public auctions are the norm with prices up to $10,000 per acre,” Mohr states.“As you move west, the prices drop significantly once you get past the Missouri River pheasant belt.”

The central portion of western Minnesota sees land values down from their high point, but interest remains strong and top quality land has sold well at auction, Mohr says. “A recent sale of 2,000 acres set values at more than $4,100,” Mohr said. “Land sales in southern Minnesota range between $5,000 and $8,000, down slightly from last year.”