A survey by the Federal Reserve Bank of Chicago shows Iowa cropland values up a "stunning" 31% in the third quarter of 2011, compared to the same period a year ago. The results were released last week. The entire Chicago Federal Reserve region was up 25%. The district includes all of Iowa, plus southern Wisconsin, most of Michigan and the northern two-thirds of Illinois and Indiana.
The Chicago Fed's report doesn't put an average dollar value on farmland prices. Another survey, taken in September by the Iowa organization of farm real estate brokers, showed a year-to-year increase of 34%, bringing the average price of farmland up to $6,477 per acre in Iowa. That is a record for the state, above the inflation-adjusted figure of $5,800 in 1979, just before commodity prices and land values collapsed into what became the farm financial crisis of the 1980s.
Farmland values are considered the best single indicator of the health of agriculture, which accounts for up to one-third of Iowa's economic output. The combined sales of grain and livestock are expected to be near $30 billion this year. Ethanol brings in another $14 billion in cash to the state.
Sales above $10,000 per acre are common in Iowa for cropland this fall
Sales of farmland in Iowa this fall above $10,000 per acre have been common, as strong demand for land, fueled by high grain prices, is pushing up land values. A sale in early October near Sioux City brought an Iowa record $16,750 per acre. Another sale in Carroll County last month brought $12,500 per acre. Demand for land is still strong, even though more land is coming onto the market.
Steve Bruere, president of Peoples Co., a realty firm based in West Des Moines, points out that not only are commodity prices strong, interest rates are low. Stock market volatility has made many farmers, who traditionally favor land over other investments, even more inclined to put their cash back into land. "Where else are you going to invest your money these days?" Jasper County landowner Ron Beyer asked recently at a land auction in Grinnell, where the winning bid for the land was $10,050 per acre.
Farm lenders say Iowa farmers are better protected from potential drops in commodity prices and land values because, unlike the 1970s and 1980s, farmers today are required to put down as much as a 50% down payment on farm loans. Variable interest rate loans, which trapped so many farmers in the 1980s, are no longer being made. "Farmers would be better able to withstand a drop in prices and land values today," says Jim Knuth, senior vice president of Farm Credit Services, the largest lender of money to farmers in Iowa.
Strong corn and soybean prices continue to push farmland prices up
Farmers are confident, bolstered by corn prices that have stayed above $6 a bushel and soybean prices that have been above $11.50 for most of this year. Corn and soybean cash receipts are estimated to reach $20 billion for 2011, double the amount brought in as recently as 2006.
The strength of Iowa farmland was bolstered by USDA's November Crop Report which estimates a 171 bushel per acre corn yield for Iowa's average this year--despite a heat wave that interfered with pollination in many fields in July, severe windstorms and hail that knocked down a number of fields, and Missouri River flooding that affected the western edge of Iowa. When final yield figures are released by USDA in early 2012, if the 171 bushel per acre corn average holds up for 2011, it would be a gain from the 165 bushel per acre yield in 2010.
In contrast to some years, livestock producers are getting high prices at the same time grain prices are high, because of strong exports of U.S meat.
Agriculture remains strong, in contrast to the rest of the U.S. economy
The 25% increase for cropland in the Chicago Federal Reserve district was the biggest year-over-year gain since 1977. The district's farmland values surged 7% from the second quarter of 2011, which ended June 30, to the third quarter, which ended Sept. 28, matching the highest previous quarterly gain since 1977.
Chicago Federal Reserve economist David Oppedahl, speaking at the Chicago Fed's annual agricultural conference last week, noted the "interesting contrast we've had here in agriculture" compared to economic trends in other areas of the economy, which have largely been stagnant. "With sluggish growth coming out of a deep recession in the general economy, we're in a situation that's highly unusual," he said. "One reason is the slump in the housing market."
Caution ahead--what could slow down the agricultural economy?
High prices for farm commodities are being noticed in Washington, D.C. as Congress is debating possible cuts in farm program spending, and also pondering an end to the 45 cent per gallon tax credit for ethanol blenders. That tax credit is scheduled to expire at the end of 2011 unless Congress acts to restore it. Ethanol production is expected to use almost 40% of the nation's corn crop this year. Iowa's 41 ethanol plants will use about 60% of the state's crop.
Another recent caution is being raised by a slowdown in corn and soybean exports. Due to high prices, exports of these crops have been running about 30% behind their pace of a year ago since the start of the marketing year, which began Sept. 1, 2011. Russia and Ukraine, whose corn and wheat crops were held off the world market in 2010 because of drought and short supplies of grain in those countries, have returned to the marketplace with large crops. Brazil and Argentina will plant more acres to corn and soybeans in their growing season.
Ag credit conditions continued to improve during third quarter of 2011
Another interesting trend, noted Oppedahl, is that food prices in the U.S. have risen 4.5% in the last year, which is higher than the core inflation rate of 2% in the U.S. He also pointed out that, according to the latest USDA forecast, 2011 net farm income in the United States is anticipated to increase by $24.5 billion from 2010, totaling $103.6 billion for this year.
The rise in 2011 U.S. net farm income would stem from gains of $34.7 billion in the value of crop production and $22.7 billion in the value of livestock production, while purchased inputs would be $28 billion higher. Elevated levels of farm income and heightened demand for farmland in 2011 have continued to support further gains in agricultural land values.
Agricultural credit conditions continued to improve across the Chicago Fed district in the third quarter of 2011. Notably, interest rates on farm loans trended below the previous quarter's record lows. As of Oct. 1, the district average for interest rates on ag real estate loans was 5.36%. Interest rates for operating loans fell to 5.66%, on average, for the district. Iowa had the lowest rate for farm mortgages at 5.24%. Indiana had the lowest rate for operating loans at 5.44%.