What goes up must come down.
Midwestern farmland prices have been on the rise, but it is predicted they will drop within the next few years.
On the rise
According to the October 2012 article “Across Corn Belt, Farmland Prices Keep Soaring” in the New York Times, “an August survey by the Federal Reserve Bank of Chicago showed a 15 percent increase in farmland prices since last year across a region that covers Iowa, Illinois, Indiana, Wisconsin and Michigan. Another survey released at the same time from the Federal Reserve Bank of Kansas City showed even higher growth in the Great Plains states, where farmland prices have increased 26 percent since last year.”
Farmland price increases, according to Bill Davis, chief credit officer with Farm Credit Services of America (FCSAmerica), are based on three factors: strong domestic and export demand for commodities, historically low interest rates and strong net farm income from cropping enterprises.
“Farmland price increases are on a par with the most dramatic seen in the last 50 years,” said Davis in a FCSAmerica news release. “The prices farmland is bringing clearly reflect the buyers’ view that returns over variable costs will stay high and interest rates will stay low.”
According to the news release, FCSAmerica is the leading agricultural lender in its four-state area, which includes Iowa, Nebraska, South Dakota and Wyoming. The financial services cooperative has assets of $18 billion and more than 60,000 customer/stockholders.
However, Davis predicts that interest rates are likely to increase and net farm profit levels will decrease.
“Most of the farmland value increases we’ve seen over the past seven years appear to be supported by long-term domestic and world demand for agricultural commodities,” said Davis. “Most buyers are farmers, and they generally are in a very strong financial position. They have made these purchases with relatively modest financial leverage.”
Steve Crittenden, senior vice president/senior loan officer at First National Bank in Creston, said farmers will be able to withstand some farmland devaluation because of their financial statements, since most farmers aren’t borrowing against their equity like they did in the 1980s.
However, there is still worry for price sustainability.
“Any time you have an asset that doubles in value over a decade, there is cause for concern about how sustainable that growth is,” said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation in the New York Times article.
Local Corning farmer Chris Gaesser, 27, farms 6,000 acres of land through ownership, crop sharing, custom work and cash renting.
“You’ll probaby see more land up for sale and getting bought. Problem is, interest rates counteract that a little bit, but if you can pay your interest it won’t change for a lot of people,” said Gaesser. “Our land rates will go up a little bit, so ... we might not buy as much new equipment and things like that.”
The New York Times article also states that farmers have less debt than they had 30 years ago, interest rates are low, and the federal crop insurance program covers a majority of losses in revenue or crop yields, several more reasons land prices are high.
Crittenden said he guides farmers by looking at their financial statements and cash flow to make sure the purchases they make work with their financial situation.
“Bankers, more or less, watch their leverage position and want to make sure the cash flow is there to support the debt that (farmers) incur,” Crittenden said.
Farmland prices are expected to drop in the next few years. Prices tend to slowly follow drops in grain prices, which is expected next year.
“I mean, you can’t really tell,” Gaesser said. “It depends on how stable the grain market stays and things like that.”
Gaesser noted that when the economy is bad, interest rates are low, so that when interest rates increase, the price of farmland decreases.
“(When) the grain market’s good, your input costs go up and everything goes up a little bit,” said Gaesser. “I mean, that’s where technology comes in handy, too. We’re saving on inputs and things like that.”
Crittenden said the price of farmland is in correlation with future interest rate increases, and since corn and soybean prices are profitable now, that is helping the farmland prices.
“It really comes down to just everything helps each other,” said Gaesser.