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Farmland Values...
Where will the land market go from here?
By Troy Louwagie, ALC
Land values have increased 10%-15% across most of the Midwest over the past 12 months and have increased 45%-50% over the past 5 years. These strong increases have everyone asking: What factors are driving this market? Are we setting ourselves up for another 1980’s era? Where will the land market go from here?
What factors are driving this market? There are many factors contributing to the strong appreciation of the farmland market. Interest rates have been at historic lows the past few years, which has allowed more borrowing power for buyers. Buyers are investing their cash into farmland opposed to CD’s or the stock market. The typical net operating return on Midwest farmland has ranged from 3%-5%. Combining this cash return with the strong appreciation has provided landowners with a 10%- 20% return on farmland.
Another factor that has driven the farmland market higher is the 1031 Tax-Free Exchange. In recent years, 30%-40% of our sales have involved an exchange. These buyers are motivated by more than just the annual return on their investment. They are driven by the desire to avoid (or at least delay) a substantial capital gains tax on the land they are typically selling for development. The increase in the 1031 buyers can be attributed to the general strength of the economy and low interest rates, which have increased commercial and residential development to high levels.
Recreational buyers have also contributed to a strong market. Many people want to own their own tract of land for enjoyment and hunting. These buyers are typically not concerned about the income generated from the farm and are influenced by the recreational attributes such as: trees, ponds, CRP and creeks. The money used to purchase recreational land primarily comes from non-farm income. This has helped increase the value of average to below average quality farms.
We have also been blessed the last few years with above-average corn and soybean yields. These higher yields have helped provide a stronger return on farmland.
Demand has exceeded the supply of farmland for sale. This has also attributed to the strong market. As there were few attractive alternative investments, very few landowners were selling their land. With Midwest land prices at record highs, we are starting to experience more farms coming on the market the past few months.
Are We Settings Ourselves Up For Another 1980s Era?
We are in a different environment than 25 years ago. The prime rate then was over 20% and now it is less than 8%. Today, a high percentage of farms have no debt and inflation is more in control. Midwest farmland is held in strong hands. We may see a small correction in the next couple of years, but I believe we are in a different environment and will not experience another major down turn in the farmland market in the near future.
Where Will The Land Market Go From Here?
Over the past few years the farmland market has experienced close to a 1% increase per month. This appears to have slowed and/or leveled since mid-summer. We believe we are nearing the end of the double-digit annual increases. With the slight increase in interest rates, lower commodity prices and higher fertilizer and fuel prices, farmland appreciation may slow down to the traditional 3%-5% increase per year. We may experience more volatility in the farmland market in the next couple of years, but Midwest farmland should continue to be a solid investment.
If you are considering buying or selling farmland, please call one of our land professionals at any office to further discuss the current land market and how we can help with your goals and objectives.
