BV agland value leaps past $3,000 per acre, but how much is too much?

Thursday, December 16, 2004

Is the current land rise different than the precursor to the 1980s Iowa farm crisis?

The value of Buena Vista County farmland has increased by a country mile in the past year, topping the $3,000 per acre average for the first time. The question becomes, how much is too much, too fast?

County land values climbed nearly 16 percent from 2003 to November 2004, according to a new study released by Iowa State University and its economist Michael Duffy.

A year ago, an average acre of farmland in the county was selling for $2,782, and today, it is at $3,223, one of the higher rates in northwest Iowa, which in turn is the highest rate for any district of the state. Prices are surpassing those of the land boom that preceded the 1980s farm crisis.

"I see it as being pretty high. A reasonable growth rate in the range of a steady 5-6 percent would probably be better," said Kris Kohl, ISU Extension farm specialist for the area. "There is a lot of optimism out there in the ag folks right now, but whether it is all justified, I'm not sure."

The 2003 crop set a record for corn yield, and 2004 will beat that by 10 percent in Iowa, Kohl said. Soybean revenue was off, but still decent, beef is break-even or a little better after a couple of good years, and swine operations are back to breaking even or making a small profit, he said - but eventually, the likelihood for a poor local crop year paired with a market setback is always a risk.

If land values grow out of proportion with yields and market prices, those who overextend themselves on buying more land could be in trouble if the rainy day comes.

Local Iowa State University farm management specialist Tom Olson agrees that booming agland prices aren't always the best form of news for the farm community.

"I think concern that we are back up to those heady areas in land prices is valid," he said.

There are some uncertainties on the horizon that local growers should be aware of, he said. "Brazil is now growing more soybeans than we do, and their land and labor is a whole lot cheaper than ours is. We have to be concerned about trading in the world economy, and we also don't know about what our next farm program is going to be. Right now we have a bit of a protective floor under the prices, but will that always continue?"

Still, northwest Iowa farmers who survived the 1980s crash have learned something from those lessons. The farmland they are buying today tends to be in cash or taking advantage of low interest rates, Kohl and Olson agree, and few are digging themselves deep in debt for expensive land, as happened in the '80s.

Agland values in Buena Vista County are also not all they appear.

Three separate quarters of land recently sold in the county - two in the mid-$2,000s an acre, and the other for a whopping $3,475, while talk on the street has a Truesdale area farm property bring an unheard of $5,000 an acre.

"These are not all farming dollars that are buying our farms. That more expensive quarter, and the land near Truesdale if that figure is true, are selling to people for the purpose of tax advantages, not what they produce as a farm," Olson said. "Glen Taylor, the Minnesota Timberwolves and Rembrandt Enterprises chicken operation owner, has been buying up farmland in Buena Vista County and other area counties for years now. That tends to warp the statistics we see for agland prices."

The range of land values being seen is rather wide across northwest Iowa.

The area high is $3,463 in O'Brien County to the northwest of Storm Lake, and the low is $2,890 per acre in adjacent Cherokee County, although that latter county saw the largest percentage increase in value in the past year, over 20 percent. The lowest percentage value increase was in Clay County, at 12.5 percent.

Statewide, farmland values grew about 15.5 percent in the past year, to an average of just over $2,600 per acre, an increase of over $350 per acre.

"The results of this year's survey show that the interest in Iowa farmland remains high. This year's average value of $2,629 is the highest ever recorded in Iowa. This is the second year in a row with a record high," Duffy said.

This is the fifth straight year farmland value has increased.

An acre of average Iowa farm was worth only $419 in 1970, but had exploded to $2,066 by 1980. The rapid explosion in values contributed to the farm crisis of that decade, and valued had as a result crashed to $1,214 by 1990 - for those who were left in farming. Iowa farmland prices recovered slowly to top $2,000 in 2002, and has continued to grow steadily so far this decade.

Still, with dollars adjusted for inflation, the values today are only about equal to the early 1970s when the boom was beginning, and below the peak of 1979.

"The survey also showed that the strength in the land market was apparent throughout the state. All nine crop reporting districts showed increases in the average value of greater than 10 percent. All counties showed an increase," Duffy said.

The 2004 survey shows investor interest in purchasing farmland remained high. In the survey, low interest rates were most often cited as the main factor for higher land value purchases. Others noted poor performance in the stock market. Good crop yields, decent grain prices and tax implications were also noted by buyers.

"There were two negative factors listed by more than 10 percent of the respondents. Lower grain prices were listed by 20 percent of the respondents. Land prices are too high and cash flow concerns were listed by 12 percent," Duffy said.

While opinions differed on the number of local sales, the survey indicated that most found the same or more land parcels being sold in both the state and in this region. About 56 percent of sales were to existing farmers. Investors represented 38 percent of the sales. New farmers represented only 3 percent of the farmland purchases.

"At these kind of land prices, it is nearly impossible for a young family to get started in farming," Olson said. "The study shows a few percent doing it, but it also classifies a farm in some cases with a total yield of less than $10,000 gross. Is that really a farm?"

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