Iowa farmland values have declined about 15% from their peak two years ago, a new survey shows. The March 2015 survey of land trends and values by the Iowa Chapter of the Realtors Land Institute reflects the drop in corn and soybean prices. Land values are likely to continue declining if crop price weakness continues.
The survey of real estate professionals is conducted twice a year, in March and September. Results of the latest survey show a statewide 7.6% decrease in cropland values for the September 2014 to March 2015 period. Combining this six-month decline with the 3.4% decrease reported in September 2014 indicates a statewide average decrease of 11% for the year March 2014 to March 2015.
Average cropland value has fallen to $7,372 per acre
In terms of dollars, the statewide average value of farmland for the year fell to $7,372 an acre as of March 2015. That's a decline of $914 per acre from March 2014. Land values also declined the previous year, falling 4.7% to $8,286 an acre in March 2014.
Participants in the survey are specialists in farmland and are asked their opinions about the current status of the farmland market in Iowa. They were asked to estimate the average value of farmland as of March 1, 2015. These estimates are for bare, unimproved land with a sale price on a cash basis.
The latest survey results aren't surprising, says Kyle Hansen, a member of the realtor's group and chairman of the committee conducting the survey. "Many people anticipated a correction after land climbed to record highs in 2013," notes Hansen, a broker at Hertz Real Estate Services at Nevada in central Iowa.
All Iowa crop districts show a decrease in land value
All nine Iowa crop reporting districts showed a decrease in value for the past six months, since September 2014. The districts varied from a decline of 4.6% in southwest Iowa to an 11% decrease for northeast Iowa.
Looking at the districts for the entire year, the largest annual decline through March was in northeast Iowa, tumbling 17.5% from March 2014 to March 2015. Hansen says that area of Iowa has struggled in recent years with weather that's been too wet or too dry. The smallest decline was 2.5% in southeast Iowa, where good yields plus strong cattle production have helped steady land values. Central Iowa prices fell 9.3% for the year.
According to survey participants, factors contributing to current land values include lower commodity prices depressing the bids. On the other hand, factors supporting land values are a limited amount of land on the market, a lack of stable alternative investments, farmers with cash on hand, and increasing interest rates. Some people want to buy and finance before interest rates rise.
Land values could continue to shrink in the next few years
Hansen says members of the real estate group believe land values could continue to shrink 5% to 20% over the next three years, depending on commodity prices. He describes the farmland market as "steady to lower" in the next several years. Corn and soybean prices have fallen 40% to 50% since peaking in 2012.
Nationally, farm income is projected to decline 32% this year, says USDA. That's on top of a 16% decline in 2014. Recent data for Iowa farm income is only available through 2013, when it climbed 20% to nearly $10 billion. The hit on farm income and the lower land values are expected to put a bigger dent in farmer confidence, which means less spending on new farm equipment, which is already affecting the machinery manufacturing industry with layoffs.
Lower crop prices, higher interest rates have an effect
"Farmers are a lot more conservative as a result of this downturn," says Ed Kordick, commodity services manager at Iowa Farm Bureau Federation. "We're getting back to our thin years." Michael Swanson, a Wells Fargo ag economist, also believes the continued contraction in farmland values in Iowa and elsewhere will be significant.
"When you start projecting your cash flow using $3 for a bushel of corn, it's a different outlook than $5 or $6 corn," says Swanson. "I think there's still a considerable downside. I don't think we've worked our way through the lower crop values yet." Also, farmland sales activity is likely to decline more with higher interest rates.
Most farmers should be able to weather these challenges
Hansen says farmland sales activity has ranged from up 20% in the past six months to down 50%, according to the survey. Most of the responses showed significantly lower activity. About 77% of the land buyers are Iowa farmers.
Hansen and Swanson say Iowa farmers should be able to weather the financial challenges ahead. Many farmers are struggling to lock in a profit because of lower commodity prices and still-high costs for inputs such as seed, fertilizer, rent and other expenses. Farmers have used the past few years of strong returns to help reduce debt. And lenders have required farmers to provide at least 50% of the farmland purchase price, so declining land values shouldn't hurt farmers too much. "I think we'll see more farmers regret that they over-paid for land than we'll see insolvency," says Swanson.
An upside to lower land values is lower cash rent
There is an upside to lower land values. Prices climbed to as high as $17,000 an acre in central Iowa. That prices a lot of farmers out of the market. When land prices double or quadruple, it's hard for other farmers to compete with the guy who has the bigger checkbook. Also, lower farmland values should eventually help pull cropland rental rates down. Ultra-high land prices the last few years have caused a tremendous run-up in cash rents.
Another advantage to lower land prices is the possibility young and beginning farmers would be better able to buy some land. However, even with today's lower levels, land values will likely need to continue to dip to help beginning farmers, says Kordick. Land values are still high enough as a barrier to young farmers getting started.
For more information visit Iowa Chapter 2 Realtors Land Institute at www.rlifarmandranch.com.