Farmland Price Rise Slows Down

Value of Iowa farmland is up again this year, but rate of increase has slowed.

The value of Iowa farmland is up again this year, but the rate of increase has slowed, according to a statewide survey of farm real estate brokers released in late September. Land values are showing a more normal increase after big gains the last five years. The average price has been in an uptrend since 1999.

All types of Iowa cropland when averaged together rose by 2.9% in price during the six month period from March to September 2006, compared with 5.5% for the same period last year. The survey is conducted every six months by the Iowa Farm and Land Chapter 2 of the Realtors Land Institute.

"Some respondents to our survey believe land prices might be nearing the top," says Troy Louwagie, president of the institute and survey chairman. In the last five years, Iowa farmland prices have increased 46%. In the most recent 12 months, prices have increased about 5%. "This is a more traditional increase," he notes.


Back to a more normal increase

Survey participants have noticed a slowdown in investors using 1031 tax-deferred property exchanges, which have in the past helped boost land prices. Other reasons for the cooling of land prices include rising crop production costs and uncertainty about future profitability.

The September 2006 survey shows a statewide average rise in cropland values of 2.9% for the March 2006 to September 2006 period. Combining the 2.9% increase with the 2.4% increase reported in the March 2006 survey indicates a statewide average rise of 5.3% for the year September 2005 to September 2006.
All nine Iowa crop-reporting districts showed an increase during the past six months. They varied from a 1.8% increase in southeast Iowa to a 4% increase in central and northwest Iowa for the March 2006 to September 2006 period.

Factors contributing to the increase in values include fewer farms for sale, continued demand from expansion-minded farmers, buyers making 1031 Tax Deferred Exchanges and good yields for most of the state in 2006. Other factors include demand for corn and soybeans from ethanol and biodiesel plants and an increase in commodity prices.


Cropland rose 3% in past six months

Concerns that could affect farmland values in the future include uncertainty of future government programs and increased fuel and fertilizer costs. Interest rates, which were rising, have leveled off over the last six months. If they start rising again that would be a negative factor.

The best land--which produces more than 160 bushels of corn per acre--rose 3% during the six months ended September 1, to reach an average of $3,797 an acre, the survey shows.

Gary Graham of Hoover Real Estate at Spencer says farmers who invested in ethanol plants are using their earnings from those plants to buy farmland. Also buying land are cattle and hog producers who have been making money for several years. Estates are the largest group of farmland sellers. A few retired farmers also are selling land.


Prepare for a landing in land prices

Survey participants are specialists in farm and land sales and appraisal. They were asked to estimate the average value of farmland as of September 1. The estimates are for bare, unimproved land with a sale price on a cash basis. Pasture and timberland values are estimated separately in the survey.

The survey has three criteria for cropland quality--low, medium and high. "This is the first time we've had three crop reporting districts with an average exceeding $4,000 an acre. That's for land in the high-quality category," says Louwagie.

The survey has shown double digit increases in recent years. "In 2005 Iowa land values were up 12% and in the year prior to that 14%. We believe we're now coming back to the traditional 2% to 5% increase per year," he says. "That's a nice soft landing—at least land prices aren't turning around and plunging downward. We've had an increase in land prices for the last seven years. We've had an uptrend in statewide average land values in Iowa since 1999."

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