Minding Ag's Business

Truth Serum for Land Values

Not all farmland surveys are created equal. Unfortunately, the disparities between them could become more apparent now that land values seems poised to reverse some of the triple-digit gains they have accumulated since 2000, points out Mykel Taylor, a Kansas State University economist.

Taylor and her K State colleagues found that farmer "hunches" about farmland markets weren't very accurate during corn's peak run-up years like 2012 and 2013. But USDA's farmer opinion surveys are one of the most widely used guides to farmland trends in many states. The problem is Taylor suspects such hunches could lag reality on the way down as well.

Using real sales data from the Kansas Property Valuation Department, Taylor found the average acre of nonirrigated Kansas farmland was actually worth about $2,364/acre in 2012--almost 40% more than reported by the state's National Agricultural Statistics Service, based on farmer opinion surveys. The margin of error was even steeper for irrigated Kansas farmland. Based on actual appraised and arms length transactions, irrigated farmland should have averaged $4,302/ace, more than 50% higher than NASS estimated. In 2013, the analysis estimated a state-level average of $2,814/acre for nonirrigated farmland, 40.7% higher than reported by the USDA survey.

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"The reason for the underestimate by survey respondents (in my opinion) is that the land market has been moving up so quickly over the past few years that, unless you are actively engaged in buying and selling land right now, it was hard to keep up with the price changes," Taylor said. "I am guessing the same will hold true if we see prices slow down or decline."

NASS has been under budget pressure in recent years, so is likely issuing fewer surveys, Taylor has said in the past. Another problem is that a number of farmers may not respond to surveys, so some counties lack enough reports to be statistically valid. Even when they do, growers and landowners may be more conscious of public auctions and unaware of private transactions that are never made public. In Kansas and many states west of the Mississippi, land records are not open to the public so it's hard to access actual sales.

Meanwhile, key Federal Reserve Bank surveys rely on banker opinions, not farmers or realtors. Fed data released last week showed choppy real estate trends across neighboring states in the fourth quarter of 2014. It's hard to gauge how severe a correction farm real estate will absorb. USDA now expects 2015 net farm incomes to fall 43% below their 2013 peak and corn prices to average under $4 through 2020. So far land buyers have hardly adjusted their expectations to that grim long-term outlook.

The Chicago Federal Reserve district reported an annual de­crease of 3% in “good” farmland values for 2014, marking the first yearly decline since 1986, according to sur­vey respondents from 224 agricultural banks across the District. But leading the pack was a 7% drop in 2014 Iowa values, compared to a 2% gain in Wisconsin. Land in the St. Louis and Kansas City Federal Reserve districts held mostly steady.

A better and more reliable public barometer of Midwest farm real estate could be in the making. Starting Feb. 27, the Peak Soil Iowa Farmland Value Index will begin reporting actual arm's length farmland sales from 50 Iowa counties on a weekly basis. (Some Farm Credit Associations collect similar data, but only on a quarterly basis and not always released to the public.) Besides compiling a 30-day running average of all farmland sold in those counties, it will convert values to the equivalent of a Corn Suitability Rating (CSR) of 60. That equates to yields of about 207 bu./acre on Clarion Loam soils with slight erosion and a 9-14% slope. Ratings closer to 100 are the ideal.

Peak Soil founder Paul Kanitra thinks sales transactions will offer more validity and avoid the whims of a survey. As the LIBOR scandal showed, parties with a vested interest in the outcome can potentially skew survey results. Studying actual county court house records will make results more impartial, he argued.

While the index only covers Iowa so far, Kanitra considers it the bellwether for most Corn Belt states. "Prices across the Midwest will move in tandem with what happens in Iowa," he said. "It's not 100% efficient, but it's better than nothing." Check out land trends at www.peaksoil.com

Follow me on Twitter@MarciaZTaylor

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jeff sanders
2/24/2015 | 5:32 PM CST
Ontario farm prices have reached the top also. A 50 ac farm with buildings converted to milking sheep, and 4 coverall buildings with a good house didn't sell at 625000 . Times are a changing.
Raymond Simpkins
2/20/2015 | 4:37 PM CST
You are right Kathy. And Marcia, just to let you know where land prices are headed a sale here yesterday was a no sale because the owners thought it was still 2013.
Kathy McHenry
2/20/2015 | 10:03 AM CST
It's more than a little disturbing to note that Peak Soil's motivation appears to be moving farmland further into another commodities investment/"asset class" as opposed to a tool for those actually involved in hands-on farming and production. When traders who sit behind a desk and computer monitor have the means to affect prices for their own financial gain and that of their investor clients, whether in livestock, grain or real estate, production farmers lose.