Too Good to Last?

05/22/2013

By Elizabeth Williams
DTN Special Correspondent

INDIANOLA, Iowa (DTN) — The first chink in the farmland value armor is starting to show up in several Midwest land value indicators. No one is predicting the "top" is in, but it’s not full speed ahead.

The Peak Soil Iowa Cropland Value Index, a new index of actual Iowa land sales first reported by DTN on April 12, measured a slight decrease in cropland values in the fourth quarter of 2012. The Index uses data from actual land sales collected from court records in 20 counties around Iowa Real estate brokers and lenders believe a flurry of sales were pushed into the fourth quarter of 2012 to avoid capital gains and other tax changes, said Paul Kanitra with Peak Soil Indexes.

"The 5.7% decline in the Iowa index between the third and fourth quarter of 2012 may reflect that sellers might not have held out for top dollar," said Kanitra. Overall, however, those 179 land sales in the select counties averaged $8,175 per acre, still up from $7,073 per acre at year-end 2011. Compared to year-end 2005 prices, at the beginning of the most recent bull market, average Iowa prices are up 175%, according to the index.

Such over-heated returns mean land grant university and Federal Reserve economists are expressing mounting concerns over risks from a farmland bubble.

Farmland sales prices are disconnected from the fundamentals, Purdue economist Mike Boehlje told a crowd of 100 farmers, realtors and lenders gathered for a land seminar in March. "The only question is whether it will be a crash or a soft landing. If it lasts too long, the adjustment will be much worse. I wish we could just call a time out and stop appreciation in the next year, to let things settle down," Boehlje said.

Kanitra believes caution may be affecting some markets. He attributes the slowdown to "some consideration of the old Wall Street adage, ‘Bulls make money, bears make money, pigs get slaughtered.’"

So far, the picture isn’t clear cut. Farm Credit Services of America, based in Omaha, also uses actual sales data to keep track of cropland values. Their statewide averages of benchmark farms have not shown a decline in land prices, but they have leveled off. In the 372 farmland sales across Iowa in the fourth quarter, Farm Credit estimates land values continued to increase about 3% to 4% over the previous quarter.

"We’ve noticed the sharp increasing trend of farmland values is leveling off, especially in the first quarter of this year," reported Ken Keegan, executive vice president and chief risk officer at Omaha-based Farm Credit Services of America. "But it’s not declining. Farmland values were almost static through the first quarter of 2013 compared to the first of the year."

Both of the actual sales-based reports try to capture a "true" fair market value for cropland by filtering out deals that are not arms-length, third-party transactions or cases where properties are highly improved.

Declining farmland values were reported by the St. Louis Federal Reserve which surveys bankers (rather than using actual sales data). In the first quarter of 2013, quality land values averaged a decline of 2.3% in the region that includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

Land values in the Chicago Federal Reserve district (which also surveys bankers) showed an average increase of 4% in the first quarter, but that ranged from a 2% drop in eastern Iowa and a 4% decline in central Wisconsin to an 11% increase in east-central Illinois. Most of the crop reporting areas showed a 2% to 4% increase in "good" farmland prices for the quarter.

The Kansas City Federal Reserve also conducts a quarterly farmland value survey. Irrigated cropland in the first quarter rose an average 2.9%, with non-irrigated cropland increasing 3.4% (compared to a 9% increase in the first quarter of 2012). Year-to-year land value comparisons are still double-digits higher. But the exuberance in farmland values is quieting down.

One factor supporting land markets is that interest rates remain abnormally low, thanks to the Federal Reserve’s aggressive monetary policies. The rates on 10-year Treasuries now run under 3%, levels never seen for the 50 years between mid-1958 and mid-2008. That has driven rates for agriculture loans to abnormal levels as well: Borrowers in the four-state region served by Farm Credit of Mid-America have recently locked in 20-year mortgages as low as 4.25% (see daily charts on DTN’s Farm Finance page, under Farm Business). Farm real estate interest rates averaged 4.6% across the Chicago Fed district in its latest survey and 4.66% (variable), 5.12% (fixed) in the St. Louis Fed district.

A recent report on agriculture’s wealth effect by Kansas City Fed economists Jason Henderson and Nathan Kauffman also raised the caution flag on land values. After posting record highs for the past two years, U.S. farm profits are expected to retreat over the next decade, they said. But a change in Federal Reserve policy as early as 2014 could exacerbate that situation.

"History has shown that a combination of falling profits and rising interest rates drive farmland prices lower," they concluded. In their view, the stage is set for another leveraging cycle in the U.S., not unlike the 1920s or the 1980s.

St. Louis Fed Survey results:

http://research.stlouisfed.org/…

Chicago Fed Survey results: http://www.chicagofed.org/…

Kansas City Fed Survey results:

http://www.kansascityfed.org/…

Peak Soils Iowa Cropland Value Index: http://peaksoil.com/…

(MZT/AG/BS)

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