Farmland Outlook

INDIANOLA, Iowa (DTN) -- No one expected farmland prices to stay strong as commodity prices tumbled lower in 2014. But unlike corn prices, farmland values haven't fallen off the cliff.

In fact, "we're heading more toward a 'soft landing,'"said Doug Stark with Farm Credit Services of America, based in Omaha.

"Inconsistent," is how Steve Bruere with Des Moines-based People's Company termed the current farmland market. "There is still a lot of capital out there looking to invest in farmland," said Bruere.

Top quality farmland is still holding its value in Illinois, reported Mac Boyd with Farmers National in Arcola, Ill. "In late 2014, an 89-acre piece in Douglas County sold for $12,900 per acre and an 80-acre farm sold for $13,300 an acre in Coles County in east-central Illinois," Boyd noted.

There are still a few headline-making sales. The highest fourth quarter 2014 sale reported by FCS of America (in the four-state region of Iowa, Nebraska, South Dakota and Wyoming) was $15,300 per acre in Plymouth County, Iowa, a strong livestock region. But, in general, the value of Iowa farmland declined 6.1% in 2014 compared to 2013, concluded FCSAmerica, which monitors real estate value trends through semi-annual appraisals of benchmark farms. The value of Nebraska farmland slipped 1.7% in 2014. Land values in FCSAmerica's South Dakota and Wyoming benchmark farms were actually higher for the year, nearly 7% to 8%, aided by strong beef calf prices and returns.

"For row-crop ground, there's downward pressure, but it's not consistent," said Bruere. "One day you'll see a real strong sale; the next day, the auction will be a 'no sale.'"

Most Midwest farmland brokers DTN has talked with expect land prices to ease lower, but no one is predicting a collapse.

"People are still hungry for the farm next door," said Boyd. "We had tremendous yields in 2014, 80 bushels per acre soybeans, 275 to 280 bpa corn. People with cash and not much debt watch their money accumulate in their savings account because they don't trust the stock market and they decide to buy land. A 3% return on farmland looks good when they're not making squat on their savings account."

However, the lower commodity prices are taking some of the aggression out of the bidding for land, said Bruere, whose company operates in nine Midwest and Northern Plains states. The higher profit margins for farmers the past three years crowded out the investor buyer. Eighty percent of the land buyers in that period were farmers, noted Bruere. Farmers used to be 65% of the buyers.

"I think they are now looking more at the economics of the purchase and are settling at a return of 4.5% to 5% with a reasonable cash rent," Bruere said. "That's a level that will attract investor buyers."

He also expects that will be the bottom of the market -- a 4.5% to 5% return at a reasonable cash rent. "There is no shortage of investor money that wants to buy farmland," Bruere said. "We're seeing more interest now from off-farm investors that view this downturn as an opportunity to get into the agricultural land market."

Bruere noted that investors have wanted to get into the farmland market for the past three or four years. "Their thinking is, 'now is my chance.' However, it's a financial decision, not an emotional one and they are looking for a solid return on their investment," said Bruere.

Farmer interest still remains high on top quality land, also, said Boyd. "I listed a 139-acre parcel two days ago for an auction in February and I've had 8 to 10 farmers just in those two days asking for the sale bill," Boyd reported.

In addition to a steady demand for farmland, the continued tight supply of farmland for sale is also keeping land values from cartwheeling lower. "The main sellers are those involved in death (to settle the estate), divorce or sale-leaseback," explained Bruere. "Owners not needing to sell are willing to ride it out. People who bought land in the past five to 10 years as an investment and don't have to sell are deciding to just keep it." Since farming has been profitable the past several years, lenders haven't yet needed to pressure borrowers to sell land.

Rents will decide what happens to farmland values, added Bruere. "There are a lot of farmland rents that have not been decided yet. Farmers are waiting for the February crop insurance numbers. Then farm operators will know their break-evens and rents will be negotiated then."

Producers have told DTN that landowners haven't been that quick to lower rents for 2015, which may moderate the drop in land values this year. Higher livestock values are underpinning pastureland. An improving economy is keeping recreational ground "hanging in there." It's true, cropland will be pressured by lower commodity prices, but investor capital is waiting in the wings and farmers with accumulated cash will also be looking for some good buys.

(MZT/ES/CZ)

Copyright 2015 DTN/The Progressive Farmer. All rights reserved.