Why Land Values Are Not Falling

Many signs pointed to a crash. Multiple years of low farm profitability, the upward trajectory of interest rates and a rise in farmers exiting the profession were just a few of the indicators suggesting farmland values would drop.

Yet that’s not reality. The average acre of U.S. cropland is worth $4,090, a level unchanged from 2016 and the third highest on record, according to USDA’s 2017 Land Values Summary. Pasture values increased by $20 per acre from 2016 values to a national average of $1,350. That’s the highest value for pasture land USDA has recorded.

Land values in most areas have softened from the record-high prices seen in the past decade. Although some areas are seeing values significantly below those of recent years, values have started creeping back up. Reports from Federal Reserve banks, universities and auction companies show land values in the Midwest, Great Plains and South are posting year-over-year gains.

“We saw land values trend down from 2013 through 2016, however it appears land values bottomed out in the first quarter of 2016 and have seen an upward trend through 2017,” says Brad Hayes, an appraiser for Peoples Company in Clive, Iowa.

Hungry Buyers, Thin Market. One factor supporting land prices is a short supply. The number of farms for sale in Iowa remains historically low, Hayes says. Meanwhile, buyers with an abundance of capital are pursuing land.

A stabilizing farm sector is also helping steady farmland values. Farmers are the No. 1 buyer of farmland, though the past few years have taught us that while farmer profitability factors into farmland values, those values don’t see the same dramatic swings as farm income.

“What is amazing to me is how muted farmland-value declines have been and how the recovery seems to have begun in many locations,” says Bruce Sherrick, a University of Illinois professor of agricultural and applied finance and director of the TIAA-CREF Center for Farmland Research. “It’s hard to find any other industry where you cut income as much as has happened in farming and still have such a small response in asset value.”

But values didn’t explode when farm income was much higher, Sherrick points out. The land market is a long-term income capitalization market, giving it greater immunity to short-term economic conditions.

What’s Ahead? Looking forward, several market influences could inflate or deflate land values, Hayes says. These include drought conditions in the Upper Midwest, increasing interest rates, crop yields, farmer profit margins and U.S. trade relationships. How these factors play out will determine the future of the land market this year and beyond. “However, it appears that the market will remain strong,” Hayes says.

Source: agprofessional.com By: Sara Schafer