Time to skip a turn with buying land?

DANIEL LOOKER 11/05/2013

In the farmland market, are you planning your next move?

If farming were a game that comes in a box, some Iowa fields would be the equivalent of Monopoly’s Boardwalk. Just this fall, land near Cedar Rapids with a corn suitability rating of 83 out of a potential 100 brought $18,000 an acre.

It missed the record $21,900-an-acre sale in the northwest part of the state in October 2012. Both prices are out of the ordinary. USDA’s most recent cropland average, from early summer, puts Iowa land at $8,600 an acre – behind only Arizona and top-ranked California, with a $10,190 average.

Even that $8,600 value makes paper millionaires of any part-time farmer lucky enough to own 116 acres of mediocre land. Iowa land appreciated at almost 18% last year, according to USDA. The rest of the Corn Belt was only slightly behind, with similar double-digit growth and with Illinois and Indiana land prices above $7,000. All these averages understate top land values by a lot, as any farmer in the “I” states will tell you.

Several years of this giddy, double-digit ride also make most of us a little nervous, prompting fears of a bubble.

Economist Mike Duffy doesn’t see one.

“We haven’t really had that irrational exuberance. It’s been exuberance fueled by record income,” he says. Income shared by nearly everyone. The bottom third of Iowa Farm Business Association members usually don’t report a profit. They did in 1973, 2011, and 2012.

Few people know the Iowa land market better than this veteran Iowa State University economist. He remembers the painful ag land price collapse of the 1980s, when he worked to help farm families hold livelihoods together.

Duffy’s statistical reach goes far. “I have rent and value data back into the 1920s,” he says. He goes to auctions and follows sales. Each May, he helps run a land valuation conference attended by real estate brokers. Duffy puts together a land value survey that has been going since 1941. This year’s results are out next month.

What does he see now? In May, a survey of land experts at the valuation conference forecasts 14% higher values in the year ending last month.

“Most of that increase has already occurred,” Duffy says. “It’s kind of a precarious market, kind of teetering.”

Some recent auctions met sellers’ goals; others didn’t.

“The big run-ups we’ve been having definitely aren’t occurring, and I don’t think they will,” Duffy says.

That view is widely shared. The Federal Reserve Bank of Chicago’s most recent land value survey showed no gain in the second quarter of this year, with values slipping some in Illinois and Michigan. The Federal Reserve Bank of Kansas City’s survey this summer says, “While most bankers expected farmland values to remain at current levels, an increasing number of respondents felt that farmland values may have peaked.”

Illinois farmland prices increased only 2.5% to 3% in the first half of 2013, says a survey in that state.

A private survey conducted by Rabobank shows a similar trend for farmland values of an increase of about 2% to 3%.

“If we get lower prices on this crop, then we expect to see a leveling off into next year, as well,” says Sterling Liddell, a Rabobank economist and vice president in St. Louis.

The Iowa Realtor’s Land Institute survey of Iowa values released in September showed annual growth of 10.6% – but just 1.2% from March to September.

Jim and Cathy Sladek, who farm near Iowa City, are among those who look at all this and are staying out of the land market. “I don’t have a crystal ball here, but the reason land prices went up is because of high crop prices and low interest rates,” he says.

Odds of interest rates staying at historic lows and corn prices rebounding to last year’s $7 range “are slim to none,” he says. “To me, that just indicates land is going to soften for a while.”

Sladek says it almost makes sense to sell some of the land he owns so that he could rent more until land prices settle back.

“If I were strictly a business person and didn’t have an attachment to the land, from a pure economic standpoint, that’s what I should be doing,” he says.

He’s not, of course. He already rents part of his family’s operation, which is scattered across five counties. Sladek started his farming career in the 1980s, when he cautiously began buying land. He limited himself to paying no more than $14 for each corn suitability rating point. “Now it’s going for $140 a point. It’s crazy,” he says.

I agree. We all know that part of the Midwest land price boom is tied to growth in corn demand for ethanol and strong soybean exports to China. Both markets are likely maturing.

So Sladek is biding his time. “I keep telling my son, it may not be like the 1980s, but there will be an opportunity to buy land,” he says. He admits, even now, he would have a hard time resisting a parcel up for sale if he could see it from his farm office window – if it’s “one I have an emotional attachment to,” he says. “I have to admit, I’m a farmer.”

That’s precisely why the land market isn’t a board game. Land grows commodities. Land itself isn’t a commodity. Each parcel is unique, often with emotional appeal. That’s one of many reasons why prices likely won’t crash. Yet, Duffy offers a caution and says, “Everybody forgets that in 2009, which was just four years ago, we saw a drop in value.” Roll the dice carefully.

Time to skip a turn with buying land?