Guessing Games

True Value of an Acre of Farmland Hard to Pinpoint

Victoria G Myers
By  Victoria G. Myers , Progressive Farmer Senior Editor
Only about 1.5% of cropland sells in any one year, according to Iowa State University ag economist Mike Duffy. (DTN/Progressive Farmer photo by Jim Patrico)

Iowa has been the unofficial gold standard for Midwestern farmland values throughout most of the real estate boom. Prices here soared over 60% in just two years. But are those numbers real? Is an acre of Iowa farm ground really worth on average $8,600, as the USDA's most recent report says?

"When the land market is changing 50 or 60% in two years, you go to auctions to see what is really happening," says Iowa State University ag economist Mike Duffy. He's seen some "no-sales" for good land recently and believes this signals a shift in the mind-set of buyers.

"People were not willing to pay what the seller thought the land was worth. That tells me something," Duffy says.

Kansas State University agricultural economist Kevin Dhuyvetter agrees auctions are good indicators. "They represent what someone is willing and able to pay," he explains. "Sometimes we hear someone say that the buyer was a fool to pay so much. But in an auction, there were at least two fools willing to pay close to the same amount for that land. Auctions are one of the best barometers we have right now of where the land market is."

LAND PRICES SETTLING

ISU's Duffy says beginning in the third and fourth quarters of this year, he saw Iowa land prices begin to flatten. Despite this, he anticipates the yearly numbers will still trend positive. Duffy's view of the land market is based not only on his 30 years of experience, but on actual sales. In Iowa, the farmland prices reported are based on real sales, not surveys. (Go to www.peaksoil.com to find Duffy's annual report.)

In Kansas, Dhuyvetter and colleague Mykel Taylor compared land sales results from their state with the USDA survey. Dhuyvetter says their data showed the average acre of non-irrigated Kansas cropland was worth about $2,364. This was 40% above the USDA's numbers.

Both Duffy and Dhuyvetter point out that many of the tools available to buyers and sellers for researching land prices are more opinion pieces than true data. Surveys reflect the opinion of either landowners or financial experts, and are based on what the person being surveyed has seen or believes to be true. On the whole, Duffy says these type surveys tend to lean a little to the positive side.

"I encourage people to follow the surveys but to recognize that they are opinion surveys and they often run higher than actual data. We studied that, looking at sales data compared with opinion data. We basically found about a 9% difference on average," Duffy says.

Dhuyvetter believes that over time, data from actual sales and information from surveys will follow each other. "In Kansas, our experience has been that the surveys tend to lag," he says. "When the market is moving fast, I have less confidence in things like the USDA's annual report. But if you want to look back over several decades and follow the trend, the USDA's survey is a good gauge to go by."

Duffy adds only about 1.5% of cropland sells in any one year. This small percentage, then, dictates the direction of the entire market, which can create challenges because corrections may take time to become clear.

"The years 2010, 2011 and 2012 were, for me, when you saw the psychology of the market take over," he says. "People got excited and the psychology of the market, the emotion, played a bigger role in prices. We saw that in the 1970s, too."

In Iowa, 2013 will likely finish with increased land values, thanks to a positive first five months, says Duffy. However, the move toward lower prices, which began in the third quarter, will likely lead to a period of flat to falling land prices.

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"If we end up with $4 corn, you'll see corrections in the land market, and values will drop," he says. And as incomes drop, Duffy is concerned some who purchased land during the buildup will be overexposed financially.

Dhuyvetter also thinks farmland is overvalued as a whole, but he adds it can vary tremendously by region.

"In the Corn Belt states, it's just unbelievable," he says. "But in other areas, where prices have not been quite so crazy, I think they are close to being about right. There are simply more downside risks than there is upside potential for most areas. I'm not saying the land market is going to crash. I'm saying prices will flatten and maybe back up a little bit."

Less likely to feel a retraction would be areas Dhuyvetter describes as "more marginal" like western South Dakota. He says land values there have been lower, but technology is opening the area up to strong yields.

That's where he sees opportunity, he adds. "Areas that can benefit from emerging technology will have the advantage. That may mean fields that are bigger and shaped in such a way as to make the most efficient use of larger machinery. Basically, I believe we're going to start discounting ground that's not as easy to farm."

FINDING THE NUMBERS

Considering buying or selling farmland? Do your homework. Find an expert through the Realtors' Land Institute (www.rliland.com) or the American Society of Farm Managers and Rural Appraisers (www.asfmra.org). And use these resources as a guide to your local land market:

-- The county courthouse. Call or drop by your county courthouse to find out the best way to track property sales. In some cases, information is online.

-- Local Auctions. Attend a land auction to see real-time transactions that give an idea of the value of specific land types and locations.

-- The Progressive Farmer's Landwatch page. Each month the magazine publishes actual land sales information from all across farm country. It includes prices, brief descriptions and contact information for the sales agents.

-- The USDA report. The USDA annual Land Values Summary is based on a survey of producers, not actual land sales. It covers a 12-month period, usually June to June. The report is released in August. The most recent report can be downloaded as a PDF at: www.nass.usda.gov/Publications/Todays_Reports/reports/land0813.pdf.

-- Federal Reserve Districts. There are 12 Federal Reserve districts across the U.S. They all provide economic updates for their specific areas, with some overlap of states. Districts that provide reports on farmland base data on survey responses from those in the financial industry. Here are the 12 districts and links to their economic reports or to sites where you can sign up for newsletters on topics of interest:

1st: Federal Reserve Bank of Boston. Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. (www.bos.frb.org)

2nd: Federal Reserve Bank of New York. New York, New Jersey and Connecticut. (www.newyorkfed.org)

3rd: Federal Reserve Bank of Philadelphia. Pennsylvania, New Jersey and Delaware. (www.philadelphiafed.org)

4th: Federal Reserve Bank of Cleveland. Ohio, western Pennsylvania, eastern Kentucky and the northern panhandle of West Virginia. (www.clevelandfed.org)

5th: Federal Reserve Bank of Richmond. District of Columbia, Maryland, North Carolina, South Carolina, Virginia and West Virginia. (www.richmondfed.org)

6th: Federal Reserve Bank of Atlanta. Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee. (www.frbatlanta.org)

7th: Federal Reserve Bank of Chicago. Illinois, Indiana, Iowa, Michigan and Wisconsin. (www.chicagofed.org)

8th: Federal Reserve Bank of St. Louis. Arkansas, Missouri, Tennessee and Kentucky. (www.stlouisfed.org)

9th: Federal Reserve Bank of Minneapolis. Minnesota, Montana, North Dakota, South Dakota, Michigan and Wisconsin. (www.minneapolisfed.org)

10th: Federal Reserve Bank of Kansas City. Kansas, Missouri, Nebraska, Oklahoma and the Mountain States. (www.kansascityfed.org)

11th: Federal Reserve Bank of Dallas. Texas and New Mexico. (www.dallasfed.org)

12th: Federal Reserve Bank of San Francisco. Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington, plus American Samoa, Guam and the Commonwealth of the Northern Mariana Islands. (www.frbsf.org)

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Victoria Myers

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