No. 6 Farmland: The Bust That Wasn’t
By Marcia Zarley Taylor
DTN Executive Editor
This was the year Grain Belt farmland values were supposed to implode. Instead, sales of good quality land continued to defy gravity, with many land markets trending sideways and some areas with bumper yields actually booking year-over-year gains.
Corn revenues have plunged 40% between 2012 and 2015, USDA estimates, removing much of the spark for farmland’s boom this past decade. By mid-year — when cash corn collapsed to the $3-range — realtors like Steve Bruere, CEO of Peoples Company based in Clive, Iowa, had expected the state’s land values to ultimately bottom 30%-40% below their 2013 peak.
Instead, “good” quality Iowa farmland actually nudged up about 4.8% through November 2015 to $8,448/acre and had only dipped about 8% since its 2013 high, according to the Peak Soil Iowa Farmland Value Index which measures actual sales transactions in half of Iowa’s 99 counties. Meanwhile, average Indiana farmland values slipped 4% through November, select Minnesota cropland counties ended with no change and select cropland counties in Wisconsin gained 1.3%, Peak Soil indexes found (see chart http://goo.gl/…). The indexes include private transactions which never hit real estate listings, as well as auctioned and listed property.
Bruere’s five Iowa-based appraisers confirmed much the same upward trend by tracking every listing and closing auction results throughout the state.
Many Midwest counties benefited from excellent yields which partially compensated for lower prices. In addition, 2014 ARC-County payments paid in October 2015 ran about $88/acre in places like Boone County. Relatively low sales inventory — only about 1.5 farms per county with 85% tillable land — also kept Iowa values higher than expected. What’s more, the Federal Reserve’s reluctance to raise interest rates until December — and then by only a quarter of a percent — meant investors had few safe places to earn a return.
Land markets may be propped up for now, but most land watchers say projected 2016-2018 farm price losses will eventually cause more erosion in farmland prices. Each 2% drop in farm income should reduce farmland values about 1%, according to Iowa State University economist emeritus Mike Duffy.
What’s different about this land value cycle, however, is that pools of private investors and institutional owners are waiting in the wings. Wall Street has had a love affair with farmland since 2008, but in many cases investors have been outbid by farmers flush with cash. Now that farm incomes are slipping, outsiders are looking for buying opportunities. For example, Farmland Partners Inc. (NYSE:FPI) smashed real estate records with its announced purchase of 120 Illinois farms totaling 22,300 acres in November. The deal catapulted the REIT into one of the Grain Belt’s largest landlords with a total of nearly 105,000 acres under its control, up from 7,300 acres in just 18 months earlier. Similar investor groups are regular land buyers in Texas, Nebraska, Colorado and the Delta.
Duffy remains optimistic about farmland’s investment value long term. Between 1950 and 2015, Iowa farmland averaged 11.2% annual returns including both net cash rents and capital gains, he calculated. Over that 65-year period, it showed 52 years of positive returns. That’s still better than the S&P 500 gains (with dividends) over history.
Timing counts, however. “If you invested in farmland the 1970s and early 1980s, you would have been better off in stocks than in farmland,” Duffy said. “Any other time, except the past couple of years, you’d have been better off investing in farmland.”
Marcia Zarley Taylor can be reached at Marcia.taylor@dtn.com
