A 50% increase in the price of corn since June is putting cash into the pockets of farmers, who are in turn bidding up the price of land at auctions in Iowa this fall. At the same time, interest rates are low which helps if you're borrowing. Low interest rates also mean investment alternatives such as certificates of deposit aren't paying much. Likewise, the stock market has provided a lot of risk and disappointment. It all adds up to land being an attractive investment.
On November 30, a 120 acre parcel near McCallsburg in Story County in central Iowa sold for $8,100 per acre. A year ago that would have been considered an exceptional price. But today it is more common. In fact, it is dwarfed by an auction sale last month in northwest Iowa, in Sioux County, where 80 acres sold for $13,950 per acre.
Farms are making money now with recently higher corn and soybean prices, and farmers have cash to spend. Last month, two 80 acre tracts in O'Brien County in northwest Iowa sold for $9,700 and $9,200 per acre. In eastern Iowa, a farm in Iowa County sold for $9,000 an acre.
How high do you think will farmland prices go?
Kyle Hansen, an auctioneer with Hertz Farm Management at Nevada says his company has handled several sales with a selling price above $8,000.
"The land market seems like it has jumped past $6,000 an acre to where it is now--around $7,000 to $9,000 an acre," says realtor Steve Bruere of People's Land Company at Indianola. Of course, you hear of some farmland selling higher, all the way up to the recent $13,950 sale. That's the top price he's heard of so far for Iowa farmland.
"There are plenty of people who want to own land at $6,000 and $7,000 and occasionally $8,000 and $9,000 an acre," says Bruere. "But to get a sale at a price at $13,000 an acre, there are some unique circumstances as part of that." For example, you have at least two bidders who are farming nearby and really want to own the land.
Farmers and outside investors are both buying land
Who are the buyers in the land market today? Are they generally the neighbor who farms next door or are more outside investors coming in to buy land? Realtors say it's some of both. Bruere says at every auction his company has handled lately, about half of the registered bidders are local farmers and adjoining landowners, and about half of the bidders are individual investors — some from out of state.
Sam Kain, a realtor with Farmers National Company in West Des Moines, says Iowa laws make farmland ownership by nonresident, nonfarm corporations virtually impossible. "Most of the buyers of land in Iowa are farmers looking to expand," he says. "Corporate buyers are going to Illinois, which isn't as restrictive on ownership."
Even so, real estate brokers in Iowa say their phones are ringing. "I get calls from a lot of farmers and Iowa investors looking for land," says Bruere. "The problem in the farmland market today is there are more buyers than sellers. That's always going to drive the price up."
Surge in farmland values is driven by higher crop prices
Tight corn and soybean supplies worldwide and stronger export and ethanol demand has sent the price of corn upward from $3.50 per bushel in June to $5.60 per bushel now. Iowa State University cost of production estimates show that farmers who were looking at a profit margin of about 40 cents per bushel for corn in June now can get a profit of $2.50 per bushel on corn. Soybean margins have more than doubled during the same period to more than $6 per bushel.
A cash profit potential like that is attracting investors away from the stock market. They can buy land and rent it out for cash. "Even stockbrokers have contacted me, looking for land to buy," says Marshalltown realtor Henry Sandve. "Stockbrokers are bullish on farmland. The stock market is largely hype. Farmland is real. It is a hard asset."
Another reason farmland prices are staying strong is there isn't much land being offered for sale. Listings are down compared to years past. "We've cleaned off the shelves in the last few months," says Bruere. "Most farms that had tillable acres on them that were for sale have now been sold. We are scrambling to try to find farms to sell."
Fewer farms listed for sale means this is a seller's market
Looking forward, a low inventory of farms for sale usually means a sellers market. Is that what we're seeing today? "I think so," says Bruere. "Despite whether I think $9,000 or $10,000 dollar land values are a good buy or not, that's the price some people are getting for their farmland. It's driven by grain prices and a lack of inventory, a lack of land available for sale on the market today."
With current crop prices, can farmland hold its value? Realtors say yes, if crop prices stay where they are today and interest rates stay where they are, land values will stay strong for awhile. But a hiccup with anything that is currently helping to drive this strength could spell trouble in the future.
For example, if Congress fails to renew the federal tax credit for ethanol blenders or if Congress doesn't extend the tariff on imported ethanol. Both of these are due to expire at the end of 2010. If these measures are allowed to expire by Congress, you might see corn and soybean prices back off somewhat. In turn, land prices would likely soften too.
Will Wall Street hedge funds come in and buy land?
Will the big outside money such as from Wall Street hedge funds come in and invest in farmland? Realtors say they don't think that will happen in Iowa because of the state's laws restricting corporate ownership of farmland. However, individual investors who have been buying commodities are going to continue wanting to buy the actual land that produces the commodities.
Summing up: Realtors say as long as commodity prices stay high and interest rates are low, the land market will stay strong. Land is in strong hands and what is available for sale is being bought primarily by neighboring farmers or other Iowans with money to invest. However, two government props for farmland values—ethanol tax credits and federal crop subsidies — are on the chopping block in Washington, D.C. Change could come by the stroke of a politician's pen.
The 45 cent per gallon ethanol tax credit will expire at the end of 2010 if Congress doesn't extend it. Ethanol now uses about half of Iowa's 2.2 billion bushel corn crop. Also, in 2011 a new Congress will be sworn in and will look for ways to reduce the federal budget deficit. Related to that, Congress will work on writing the new 2012 farm bill to replace the current version that puts about $1.2 billion annually into Iowa in the form of government subsidies for crop insurance and direct payments to farmers.
On December 15 Iowa State University economists will release their annual survey of farmland values in Iowa. The statewide survey results and analysis will provide an update on current land prices for 2010.