Outlook – Farmland not Ready to Retreat

By Marcia Zarley Taylor DTN Executive Editor
DTN ProgressiveFarmer.com

outlook-farmlandAUSTIN, Texas (DTN) — The standard advice for mountain climbers is not to look down. But it is hard to stay calm if you’ve watched the trajectory of U.S. farmland since the turn of the century — up at least 300% on average since 2000 in much of the Midwest and showing no sign of even pausing in early 2013.

In the first week of January, 373 acres in central Iowa with no commercial development potential commanded $17,000 per acre — more than $3,600/acre above a veteran appraiser’s expectations and 70% above the county’s average just last November. The farm sold in nine minutes.

“A direct reflection of how little I know,” said Murray Wise, who has owned and managed Midwest farmland auction and farm management firms for more than 40 years.

“Nobody in their wildest imaginations thought we’d see land values at these levels,” agreed Neil Harl, a retired Iowa State University ag law professor and one of the nation’s leading estate tax attorneys.

Since 1940, when Iowa farmland sold for an average of $88/acre, there’s been only one serious correction in price. After bottoming in the late 1980s, farmland has appreciated every year but two, according to Iowa State’s farmland value surveys.

Harl bought his last half-section in southern Iowa in 2002 at $1,600/acre and has seen lower-quality land sold at $7,500 to $8,300/acre in the past year.

The unrelenting rally is complicating estate and succession plans for the ag sector. Without planning, on-farm operators may not have the spare funds to pay both estate taxes and disgruntled heirs who want to cash out now.

“I am personally following 15 farm families who are arguing over estates in court or will soon be there,” Harl said. Some of his former students tell him there wasn’t a cross word between siblings in their family until their parents died. Now the families are dividing into factions.

“When land was $1,500 or $2,000, it didn’t seem to matter,” Harl said. “At closer to $20,000, it does.”

Appreciation isn’t limited to Iowa farmland, but it is the bellwether of real estate gains across the Corn Belt.

Drought badly decimated yields in northwest Missouri last season, but that didn’t seem to faze farmland-aggressive buyers and sellers as New Year’s approached, notes Dirk Talley, an owner of Show-Me Real Estate, just outside Kansas City. He estimates that land notched another 15% gain in his area last year. Most of that rally occurred in the last four months of 2012, putting appraisers and real estate attorneys in short supply as sellers raced to settle deals before year-end. Some included escalator clauses of 8% on sales prices, if the agreements couldn’t be closed before capital gains rates jumped Jan. 1. The buyers didn’t seem to blink, Talley said.

Now that capital gains rates will range from 20% to 25% on affluent sellers — up from 15% the past decade — brokers like Talley wonder how the market will react. “If you could get $4,500/acre for land around here in December, will owners demand 5% extra now to cover their taxes?” he wondered. “Part of me said yes, because there’s not a lot of inventory left. But how high can land go?”

In the Eastern Corn Belt, the number of farms trading hands is about half of the normal 3% per year rate, said Howard Halderman, president of Halderman Real Estate, Wabash, Ind. Properties that would have been sold in early 2013 were listed early to avoid the tax deadline, a factor further exacerbating supply shortages later this winter, he said. “Tax policy was a major factor in farm sales in the last half of 2012.”

Besides scarce listings, two other factors continue to encourage record-breaking sales prices: all-time record incomes for crop producers in 2011 and 2012 and rock-bottom interest rates not seen since the 1950s. Louisville-based Farm Credit Services of Mid-America (which does not pay patronage dividends) charged only 4.05% on 15-year mortgages at year-end.

Farm lenders worried about a potential replay of the 1980s “have excellent governors in place to manage farmer debt levels,” Halderman said. That should reduce the risks should repeat drought, lower farm incomes or a big hike in interest rates happen any time soon.

“Sustainability” policies in place since 2008 mean lenders require more equity and repayment capacity based on long-term corn prices of $4.50 per bushel, not the current $6 market price. At Farm Credit Services of America in Omaha, such restraints mean a maximum mortgage level of $5,900/acre even on 200-bushel corn ground that the association appraises at $9,000.

The purpose is to help prevent overextending credit in a period of rapid appreciation. That’s seemed to work so far: 97% of borrowers have at least 65% equity in their properties, and three out of four have locked-in fixed-rate mortgages. That should be a shock absorber for price fallouts, when they come.

“It’s not anything like the 1980s farm credit crisis or the housing market after 2007,” Doug Stark, CEO of Farm Credit Services of America said.

“I’ll cut right to the punch line,” Stark told the DTN-Progressive Farmer Ag Summit last month. “There’s a risk of correction in land markets, but they’re not done rising yet.”