Iowa Farmland Prices – Boom or Doom?

Wednesday, December 7th, 2011
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Iowa Land Values Boom or Doom?

Everyday I hear some new comment from someone about the current land market in Iowa, its to high, its to low, its just right… I guess my point is, its on everybodies mind.  You are more likely to walk into a coffee shop in Iowa and hear discussions about land prices, land auctions than you are to hear about anything else.  The agricultural economy is good but its no secret that land prices have increased sharply over the last 5-6 years and each increase in land value has become sharper than the last.  During the late fall and winter auction season it seems that each auction sale goes higher than the last even if they are only a week apart.

Are those days coming to an end?  Yes.  That’s the easy answer, it has to come to an end but that doesn’t mean land values will go down, even though they could adjust slightly, they could drop in a big way.  I would say most people that I work with can withstand a 30% devaluation in land prices.  Most producers have money in the bank and have protected themselves.  This brings about the question, are we in a farmland bubble?  You heard about the housing bubble that popped in 2007 right?  Or how about the .com bubble that burst in the 1990′s?  Usually when you are in a bubble its not immediately recognizable and my own opinion has always been that land really was playing catch up, farmland was likely undervalued for a long time but as we see many changes in agriculture it wasn’t really until this point in time that it could catch up.  With producers doing well over the past half decade an a bit more and the ability to put some money in their pocket they can now fully take advantages of what technology and manufacturers had in store for them.  Bigger more effective and tech driven equipment allows producers to farm more acres, they have the money in their pocket now to buy those acres and sound agricultural economics (good commodity prices) of the time coupled with low interest rates made the catch up possible.  Take away any of those and its no longer possible.  For example, raise interest rates and value increases drop.  Things no longer pencil out when you have to pay more interest, it really comes down to what has to go into that debt service in a given year, valued against the amount of income that can be derived from the asset.  Interest rates go up, or commodity prices come down and the equation tips.  Not much bubble in that thinking, other than if you are an investor that bought farmland recently and you have no other leverage in agriculture.  For the producer that has made a land purchase recently they are leveraging against many other debt free acres they own so they are still ok.

Iowa Farm Prices Cause for Concern?

Is there any cause for concern?  I read an article today from The Wall Street Journal that was titled Macquarie Warns of U.S. Farmland Price Bubble.  The article quotes Macquarie Agricultural Funds as saying “with diminishing returns, investors are turning toward South America and Eastern Europe where capital cost per unit of crop production are lower and sales are competitive”   Speculative investors in the farmland market have contributed to the increase in prices and when you take that money away you take away competition which will have the effect of lowering land sales prices.  I know investing in foreign farmland is not for everybody and many smaller investors will stay in US Farmland but its easy to see that large funds will begin to move their investment activities to places where land is cheaper and the return better than they have been seeing in the Midwestern US.

What does this mean to the seller of farmland in Iowa?  If you own farmland you intend to sell is holding on another year going to put you in a better spot?  I doubt it, something tells me the brakes are about to come on, you’ll still see fierce competition between producers for farmland properties but with less of the influence of these large funds we are more likely to stay level or see a slight drop than we are to see another large increase over 2012 like we have in the past.  Its yet to been seen that these investors will fully pull out but the warning signs are in place.

Related Posts on DreamDirt TV:

  1. Iowa land value as high as an elephant’s eye by CBS
  2. The Iowa Farmland Bubble “Primed to Burst”
  3. Farmland Values Continue to Move Higher in Iowa
  4. Mahaska County Iowa Farmland Prices on CRI Weekly News
  5. Should Your Next Investment Be Farmland?

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  • http://www.DreamDirt.com Jason Smith

    Jeff Hunting has an influence on a different class of land. You really can break most land down into 3 catagories of High, Medium and Low quality land. Hunting buyers affect the Low quality land catagory the most. Hunting land was born out of demand from out of state residents and a supply by out of state residents and the industry was driven by the lure that out of state residents would pay more for it than neighbors and other locals. Probably true in many cases but as that business has matured and the market has flooded with people that sell recreational land the market flooded with recreational land listings and there became more choice which really acted to lower the price to about what locals would pay. I’ve sold lots of hunting farms, lots of ag farms and one thing I can say is buyers are savvy and I’ve yet to find one that just walks in, opens the checkbook and says “Who do I write the check to” Farms are investments first, recreational second. We went through a big correction in the recreational market in late 2009 through 2010 where prices adjusted. There was angst on both seller and buyer sides. People that had invested in rec farms were now holding assets that were no longer worth what they had into them and as some sellers told me “the interest on these loans are eating my lunch” I don’t think that the low quality land market has much affect on the high quality land market. Much of the hunting land has lower quality tillable land in small fields mixed with timber, erosion and even sometimes access issues. High quality land is a different bird, its open fenceline to fenceline high quality high CSR dirt. If there is any affect some of the folks that farmed these smaller farms that became recreational farms may have moved from farming the lower quality stuff to the medium quality stuff… but at the same time we are seeing reductions in the number of farms and an increase in the size of farmland ownership by producers… or at least control of through ownership and leasing. As far as the TV shows, big bucks are entertainment, I live and hunt in Iowa, I’ve filmed some outdoor TV and I can tell TV makes it look easy… you never see the hundreds of hours of boredom in treestands and blinds and to be honest I’d say maybe 2-5% of the people watching these shows can actually afford to buy land but they have that money because they are savvy people, they don’t over buy or pay for overpriced stuff so any argument that they drive the price us really doesn’t hold. If anything moves the price up any it would be the additional demand and competition but it would be slight.

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