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The HOT Topic! Whats Going on With Iowa Farmland Prices?

By Jason Smith, CAI Auctioneer | Land Broker | Published November 29, 2017

As we near the end of 2017 the predictions of a sudden and strong decline in farmland prices has yet to play out for the 3rd year in a row.  In fact as we experience the post harvest bump in farmland prices things are looking really strong.  Farmland auctions across Iowa continue to produce excellent results.  Our land auction team has been very busy all year conducting back to back to back farmland auctions all across the state and have experienced very strong results often beating our pre-auction value estimates and selling a record number of acres at auction again in 2017.

Farmland Prices in Iowa

As we head out of 2017 for 2018 we can look back through the year and get a better sense of what we have by looking at where we have been.  2017 started off fairly slow in the Iowa farmland market.  The first 5 months were fairly inactive statewide in terms of total volume.  In fact figures show that in 2016 the Iowa farmland market sold less than 1/2 of the volume of farmland as it did in 2012.  2012 was an exceptional year when we were experiencing record commodity prices and it forced a sudden run on farmland by farmers whohad cash to spend and investors that wanted a piece of the action.  In August 2012 we saw $7.89 a bushel corn but those days gave way in 2017 to the same prices we were seeing in October 1974 which was the height of the last agricultural super cycle.

You have to go back a decade to see the commodity price levels we are at today to January 2007.  Knowing that you have to wonder how we can have the lowest commodity prices in a decade and farmland prices at near market highs?  If you are thinking of selling farmland this is good news!  There are several factors holding the Iowa farmland prices up today but chief among them is the lack of farmland available for sale.  There are more buyers than their are sellers which puts buyers in a position to have to compete for farmland at prices that are higher than its income producing potential right now.  The key part of that sentence is the words "right now"  Now nothing is guaranteed in this world but farmland has always been a good investment when its a long term investment.  Certainly there are scenarios where short term ownership can be profitable but my experience in todays market is that the buyers are the long term holders such as farmers, family trusts and business type investors.  There are no speculators in the farmland market and has not been for quite some time.  I do not count investors among the speculators even though a speculator is likely an investor.  Investors have been more active in our auctions in 2017 because of the lack of availability of farmland.  It is no secret that farmland investors prefer not to buy at farmland auctions because the price levels will push past their desired margins but their participation has helped boost prices.  We have had several auctions this year where investors were the runner up bidder which means they were a part of setting the market higher than farmer vs. farmer auctions.  Competition between the two different buyer types creates the ideal situation for the auction environment and especially the seller of the farmland.

I have recently done several media interviews with different newspapers and farm magazines on the topic of farmland prices and the writers continue to ask 1 particular question.  How long will this last?  That really could be

farmland appraisals in iowathe toughest question for anybody to answer because it requires knowing things we do not know yet.  Absent a magic crystal ball all we can do is speculate using the best available information.  There are several scenarios that could play out and they are all based on commodity prices.  If commodity prices recover to a more profitable position things go up, if they persist at their current lower levels they go sideways and down over time.  Each scenario also presents a different long term result or symptoms of the scenario.  For example should low prices persist we are more likely to see it compounded by distressed assets in the marketplace which is certain to put pressure on farmland prices.  If things move up then we likely just saw a tough bottom but we don't ever see a supply of distressed assets in the marketplace.

Why are commodity prices low right now?  What can fix it?  Again, different scenarios make different results.  Each crop cycle is different and can be affected by overall yields which are affected by weather, insect and weed pressures.  We've recently been turning out record yields year after year, a real testament to the ag technology available today and the skill of our farmers.  Unfortunately for them good luck and doing a good job doesn't always produce the long term results they hope for absent demand which we will cover next.  That said an individual farmer can still have a profitable year in a  down market.  They say the only way to beat a down market is with yield and that is the case.  Any bushels a farmer can produce beyond his average in a poor year makes a difference in profitability but it does nothing for the overall market.

Yield and supply is only half the equation, demand is the other.  Increasing demand for commodities would have a positive impact on US commodity prices and should new trade partners be made we would see it boost prices.  Higher price commodities means land prices remain stable or move up.  In today's political climate we see trade agreements in flux and changes in the future that are sure to impact commodity prices.  With the USA withdrawal from the Trans-Pacific Partnership and the debate surrounding North American Free Trade Agreement we see our relationships changing.  The USA currently has trade agreements with 20 countries. Worldwide there are 274 trade agreements which tells us there is a big potential for additional demand.  The US currently has agreements with only Australia, Bahrain, Canada, Chile, Columbia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and South Korea.  With trade agreements in flux today there is hope that the US can find additional markets for ag exports that are advantageous to the ag community and for that reason it leaves a question mark for future farmland prices because today nobody can know how this will play out.

Something I always tell my clients when they inquire about selling or ask "when is the right time to sell" and the truth is that these things never change very quickly.  Today you know where you are because we can look back and see the pattern.  In November 2017 farmland prices are strong on good quality farms.  Farmland prices for mediocre farmland is steady and moving sideways and lower quality farms are losing more value than other classes of farms but still today remain at levels above where they were 5 and 10 years ago.

My professional opinion tells me that despite all the possibilities knowing what I know because I do this day in and day out which includes talking to my peers and other industry professionals, reading everything I can read, examining the situation daily that we are likely in 2018 to see additional distressed farm real estate assets in the marketplace.  I don't believe it will be an overwhelming amount.  With very low sales volumes right now the market has not even noticed the few that have hit the market in 2017 but its likely the beginning of more to come.  As we wrap up the 2017 crop year and head toward Spring and new operating loans for 2018 we are in a period where some decisions will be made.  Some of those will be farmer retirements which could affect land supply.  Some of them will be bankers that force a farmer to sell non-performing assets in an attempted to create some liquidity in the operation and some of them will be farm failures through bankruptcy and foreclosures.  I believe these things present the greatest potential for pressure on farmland prices when coupled with the lower commodity prices.  Renewed interest by investors recently could dampen the effect of new supply at least initially but if the situation persists we are more likely to see a sharper downturn in farmland prices.

If you are researching farmland prices and considering selling a farm contact us and let us help you with the right information you need to understand your particular situation and farm.  You call me directly at 712-592-8965 about selling farmland.

 

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