Can You Believe $20,000 Per Acre?

Can You Believe $20,000 Per Acre?

A new record price for Iowa farmland was set at an auction in northwest Iowa this week. A 74-acre tract near Hull in Sioux County sold for $20,000 per acre.

These are truly historic times for land prices. A new record price was set for farmland in Iowa when a 74-acre tract near Hull in Sioux County was sold at auction on December 7, 2011 for $20,000 per acre. The buyer was a neighboring farmer, Leland Kaster, who bought the land from Clinton Shinkle who lives in the state of Washington.

A 74-acre tract near Hull in Sioux County was sold at auction on December 7, 2011 for $20,000 per acre.

"Farmland is very valuable up here in northwest Iowa," says auctioneer Pete Pollema of Hull, who called the sale that was held on the land. "We have good commodity prices now, and a strong livestock industry in this area." Pollema says he started the bidding at $15,500 because he had talked to a lot of people beforehand and good cropland is in demand. He knew there was already one offer for $15,500 an acre for this 74 acre parcel.

The total sale price figures out to $1.48 million. "At $20,000 an acre, if they could have sold another acre, it would have been an even $1.5 million," pointed out one of the non-bidding farmers who attended the sale.

Previous Iowa record for cropland was $16,750 per acre

The previous Iowa land price record was set earlier this fall when a 120 acre farm near Sioux Center, also in northwest Iowa, sold for $16,750 per acre. That was in early October. In late September an 80-acre tract near Sully in central Iowa went for $16,200 an acre.

In setting the new record, four farmers were bidding on the land that eventually sold for $20,000 per acre. Two of them dropped out and the second high bidder ran it up to $20,000 before he dropped out.

Loren Flaugh, who lives at Primghar in O'Brien County in northwest Iowa, which adjoins Sioux County, attended a land auction the next day, December 8, at Primghar. "Listening to the farmers in the building at the auction at Primghar this morning, the big buzz was the land sale yesterday in Sioux County for $20,000 per acre," says Flaugh. "Everyone in northwest Iowa has heard about it and most probably still don't believe it."

Flaugh continues, "About 50 people were at the sale here in Primghar this morning. It was a 60-acre piece that sold. The auctioneer started the bidding at $12,000 per acre but quickly dropped down to $7,000. Before he was done, the bidding got back up and the 60 acres finally sold at $11,300 per acre. An 85-acre piece of ground will be auctioned at Sheldon on December 16. That is also Sioux County ground. It'll be interesting to see what that piece sells for."

Other factors enter into the price land brings at auction

The Federal Reserve Bank of Chicago in November released the results of its survey of ag lenders. It showed Iowa farmland rose by a "stunning" 31% in the third quarter of 2011 compared to the same period a year earlier. Overall for the 12 month period ending November 1, 2011, Iowa farmland prices increased 34%, according to the survey.

David Oppedahl, economist with the Chicago Fed, says his survey showed a 25% rise for the entire Chicago Fed district, which includes all of Iowa and parts of Illinois, Indiana, Michigan and Wisconsin. Thus, with a 31% increase for the third quarter, Iowa is leading the way.

What is his reaction to this latest land sale--the $20,000 per acre auction price in northwest Iowa? "It certainly is a big increase and we've seen those big increases, but these highest prices aren't the average for an area. You have to keep that in mind," says Oppedahl. "Sometimes there are unusual circumstances in local areas. You can get situations where the land for sale is right next to yours and you want to add onto and expand your farming operation. Or maybe you need the land as a place to apply manure from your livestock enterprise. Or there are two or three people nearby who for years have desired owning a piece of land and they are determined to outbid each other to get it."

Higher farm income, strong commodity prices are driver

"We have higher farm incomes now compared to recent years and that is definitely driving farmland prices higher," notes Oppedahl. With strong grain and livestock prices, the expected earnings from land are higher over the long-term now than we've seen in the recent past. Another factor is the low interest rate, he says. Where else are farmers going to invest their money to get a better return on investment? Certainly, it's not in certificates of deposit.

Also, the debt load isn't as big among farmers these days, thanks to higher farm income. "I don't know the situation regarding this particular piece of land in northwest Iowa that sold for $20,000 an acre," says Oppedahl. "But a lot of the high-price land sales taking place now are cash-based. A lot of this land today is being financed with a low amount of debt. The down payments are high, lenders are requiring 50% down. In some cases the entire purchase price of the land is being paid for with cash. There is little or no land debt being incurred in many of these situations."

Price of corn has declined from levels of last summer

Iowa State University economist emeritus Neil Harl calls the high prices being paid for land today "amazing." Crop prices are certainly down from the levels of last summer but they are still higher than a year ago. And not much land is being offered for sale at these high land prices, he notes. Once we see what happens in the 2012 growing season, time will tell whether or not people who have land for sale should have sold that land earlier.

The price of corn, which is the benchmark that sets Iowa land prices, has declined by $2 per bushel since early September and closed at $5.82 a bushel on December 7, 2011 on the Chicago Board of Trade. Although many people have predicted a coming crash in land prices similar to the decline in the decade of the 1980s, Harl says he is less sure of an impending collapse.

"Remember that in the 1970s we had very high corn prices (the equivalent of more than $20 per bushel in today's money) for about 18 months but then they went down," says Harl. "Even so, land prices stayed high through the end of the decade of the 1970s."

What happens to land in future depends on crop prices

Harl points out that a large portion of the U.S. corn crop now goes into ethanol production. "A lot will depend on our government's policy for biofuels," he says. "The 45 cent per gallon federal tax credit will disappear at the end of this year as that legislation expires and the 54 cent per gallon import duty on ethanol coming into this country is being threatened." Thus, ethanol imports into the U.S. could increase if that import tax is removed.

What is most important, says Harl, is the Renewable Fuels Standard, which will mandate the use of more than 13 billion gallons of ethanol in the U.S. next year. There is some pressure on Congress by certain groups who want to do away with the Renewable Fuels Standard. Will the Renewable Fuels Standard be maintained?

The inflation-adjusted statewide record for Iowa land prices was set in 1979 with $5,770 per acre for the average. After a long decline, that figure was reached again only last year. Iowa State University will release its annual statewide land price survey for 2011 on December 14 at a press conference on the ISU campus at Ames.

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