Earlier this fall an 80 acre tract of land in Northwest Iowa sold for over $20,000 an acre and similar parcels in that county have also been sold for some of the highest prices for cropland ever in the Midwest. Last week in Kansas City, a long time farm manager and investor, Murray Wise of Murray Wise Associates in Clarion, Iowa told farm broadcasters prices like that may seem high but they pencil out for the farmer buyers of those pieces of land.
Wise, who has been involved in land dealings for most of his life, said prices will remain high as long as the current economic conditions for agriculture continue. He told us two of the main things that would turn around current land price trends would be “falling commodity prices and higher interest rates and I don’t see either of those two things happening any time soon.” The volatility in the land price market is encouraging prices to go higher. He also added that land is one of the best, low risk investments available in today’s economic climate. His formula for evaluating the risk of land ownership is based on the rate of inflation. He said, “With today’s inflation rate of 2%, you can look for land to appreciate at 4% giving you a 6% return on your low risk investment.” If you figure inflation at 3% and land prices go up twice the rate of inflation, land owners can expect a 9% return on their investment. Wise calls current farm land ownership an attractive option for an investor’s money for a low risk asset.
When asked about comparisons to high land prices in the late ‘70s and early ‘80s, Wise said there really is no comparison because of the difference in interest rates. He explained that “In the ‘80s the average farmer carried $22 worth of debt for every $100 in assets, but today a farmer has only $9 worth of debt for every $100 in assets.” He also added that many times farmers making high dollar land purchases aren’t going to the bank for financing as they have enough cash reserves to do the deal. Wise, who has varied business interests, added that “We’d be hard pressed to name any other industry in the United States that is as conservatively leveraged as farming is today as far as land prices.”
In Iowa, where the highest crop land prices continue to be paid in the Corn belt, “75% of farms have no note or mortgage associated with their farm land” Weiss told us.
Another major factor keeping land prices high is the lack of land coming up for sale. Wise said it goes back to interest rates and commodity prices. Most of the land is owned by older farmers and Wise said, “They’re not gonna sell it and put it in the stock market or buy low interest government bonds or put it in a CD for a quarter percent interest.” He also pointed out that some of those half sections in the Corn belt can bring as much as three million dollars, “And if you want FDIC insurance you’d have to go to about 12 different banks to get it all insured and I sure wouldn’t do that and they won’t either.”
For more land to come on the market, interest rates would have to go up significantly and that doesn’t appear imminent. Older farmers are also staying on the land longer as Wise pointed out. He said they no longer are moving to town to live in a small house and tend a garden. “With today’s machinery having air conditioned cabs, GPS, auto steer and other new technologies, farmers are finding it easier to stay on their land and continue to farm—they’re enjoying their lifestyle” Wise told us.
The lack of land availability is evident in five of the top farming counties in Illinois. Wise’s company has found that in those counties, less than three tenths of one percent of farm land has changed hands in the past few years. For those five counties, the highest rate of change has been only one percent.
Another reason farmers are hanging on to their land is the ever increasing price they’re getting from land rent and leases. That trend, tied mainly to commodity prices, is only going up and farmers still have some control of their assets.
Wise added, though, that the farm land price situation isn’t immune from our country’s overall financial crisis but he said, “I own a lot of land personally and it’s the asset I feel most comfortable with relative to some of the financial challenges we might see in the United States in the coming months and years.”