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David Sparks Ph.d Land Values
by David Sparks Ph.d, click here for bio

Program: Line on Agriculture
Date: July 26, 2018

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Buyers of agricultural land are wondering if now is a good time to make a purchase, while at the same point in the market, sellers are asking if they should sell. Are farm land values still trending down or have they bottomed and higher prices are on the horizon?

 

Individual landowners and investors are both scratching their heads as to the current land market and where it might go. It is as if there are two land markets: one that says it is a good time to sell and one that indicates that it is time to invest in land. 

 

The underlying strength in values of good quality farm and ranch land is supported by a number of factors. Number one is the fact that there is currently less land for sale on the market than normal. For example, in 2017 in Iowa, approximately two-thirds of one percent of ag land sold in the open market, which is less than the average 1 percent that sells per year. Even though the Iowa land market was slow last year, Farmers National Company sold 20 percent of the land in the state that was sold through a brokerage firm.

 

Another factor supporting current prices for good quality land is that there is adequate buying interest at this time. The overall agricultural sector remains in a relatively good financial position with a low debt-to-asset ratio. This fact, combined with past profits, allows some farmers and ranchers to be in the market to purchase land that enhances their operations. Also, the fact that neighboring farms do not come up for sale very often increases buying interest when a tract does come up for sale. This is evident in the success Farmers National Company has had in Michigan selling a large group of farms that have been off the market for some time.

 

In addition to these factors supporting current values, land is a long-term investment and there are reasons supporting land prices in the decades to come. One is the expectation that there will continue to be an increasing demand for food and fiber due to world population growth and the improvement in personal incomes around the globe. Even with the recent increase in tillable land around the world and increasing crop yields, growth in grain demand is projected to stretch production to its fullest. 

 

The other side of the land market indicates that it is appropriate to sell during this time period. For one, agricultural land values remain historically strong even though they have dropped from the highs of several years ago. For those who have owned ag land for a period of more than a decade or for those who have recently inherited land, today’s values far exceed those of the past. The decision for those contemplating a sale of the farm or ranch is whether to sell now and capture what still is a very good price or hold for a later sale.

 

Currently there is not a lot of good quality ag land for sale on the market. If additional land comes up for sale, one question is how much can the market absorb without turning prices lower. The expectation in the land market is that there will be some additional sales of land going into the winter in order to shore up financial conditions of some farmers. Therefore, at what point will an additional amount of land for sale in an area move prices down?

 

With the continuation of lower farm incomes, operators will have less cash available to make capital purchases such as land. As farmers and ranchers typically buy 80 to 95 percent of the land that comes up for sale in an area, any slowdown of their purchasing will lessen the bidding for land that comes up for sale. The concern in the market is at what point does the expectation for some additional land coming up for sale meet with the potential for less operator demand to lower land prices?

 

Several other outside factors may influence the land market going forward. Rising interest rates, although slow, will have an effect on those land buyers financing their purchase and for those comparing alternative investments. In addition, rising yields on government bonds may indicate increased return expectations from ag land as the two have some correlation. 

 

At this time, there are good reasons to support the tale of two land markets with one saying it is a good time to sell and one indicating it is time to invest. Besides the previously mentioned factors on both sides, there are the wild cards of weather, crop yields, energy prices, government policies, and world events that can override the current status of the land market. The next several years will decide the direction for the land prices.

 

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