Land values increase for agriculture

Aug 9, 2013

Ag land values are up this year, and up nicely. “Nicely” as in cropland values increased 13 percent in one year. Why? It’s the old tale of supply and demand—low supply in the face of high demand—with the added grease of oil money to spur higher prices in parts of the country.

Across the country, the average values for ag land and real estate—farm real estate, both irrigated and non-irrigated cropland, and pasture land—increased, but some regions fared far better than others. According to the annual Agricultural Land Values report, the areas of the Southwest ravaged by drought have seen ag property values suffer, while areas of the Corn Belt and Northern Plains have seen handsome increases.

Average farm real estate value, which includes the value of all land and buildings on farms, rose 9.4 percent in 2013 compared to the average value of 2012 at $2,900/ acre compared to $2,650/acre. The highest values were in the landstrapped East Coast/New England area, though this is nothing new. In corn and cattle country, the highest values were seen in Iowa at $8,400/acre and in California at $7,300/acre. While the price of farm real estate was nothing new in California, the Iowa average values represented a 20 percent increase compared to 2012.

The largest one-year increase in average farm real estate values was seen in North Dakota at an increase of 36.3 percent with values at $1,690/acre. Conversely, the largest decrease in ag land values—as well as the lowest dollar amount paid on average—was seen in New Mexico. At an average of $550/acre for farm real estate, the state saw a 1.8 percent decrease in values. This was, unfortunately, a trend repeated throughout most all the areas of ag land.

Average cropland values increased 13 percent over the country in 2013 compared to 2012 at an average of $4,000/acre compared to $3,540/acre, respectively. The highest average cropland values were again seen in the New England area, but in cattle and corn country, the cropland values were highest in Arizona at $9,000/acre and at $10,190/acre in California. Both numbers only represented modest year-to-year percentile increases at 5.9 and 3.9 percent, respectively.

The lowest quoted cropland value average was seen in Wyoming at $1,250/acre, but there were insufficient reports in Nevada to establish an average. New Mexico again saw the biggest percentile decrease in average cropland value, down 9.6 percent at $1,510/acre. North Dakota, on the other hand, saw the largest percentile increase in cropland values at up 41.5 percent with $1,910/acre. South Dakota also had some large percentile increases, and high dollar values at up 30.2 percent with cropland averaging $3,020/acre.

In states with both irrigated and non-irrigated cropland, the value of irrigated cropland was unsurprisingly higher than that of non-irrigated cropland. This makes sense, particularly with the longrunning droughts. However, an interesting detail in many of the Western and Southwestern states was that the year-to-year percentile movements were sometimes in the favor of non-irrigated cropland.

For example, in all “Mountain” states which had both irrigated and non-irrigated data—Idaho, Montana, Utah, Colorado and New Mexico—the value of non-irrigated cropland either increased more on a percentile basis than did irrigated cropland, or in the case of New Mexico where both declined, nonirrigated cropland values declined less.

When asked about this intriguing situation, Rick Kusel, broker associate with Cumming Realty in Julesburg, CO, said that it has everything to do with the recently depressed prices of dryland in the West in recent years.

“I think the reason it has jumped more is our dryland crop values were pretty low to start with,” he said of Colorado dryland, though he did later mention the situation was similar in other western states.

“What we have seen is northeast Colorado has really lagged behind on the drylot prices compared to what we’ve seen over the borders in Kansas and Nebraska.”

He also pointed out that the price activities of areas of the Midwest, and particularly Iowa, have been leading the trend in cropland values for the past few years and that pull is beginning to move prices elsewhere in more noticeable ways of late.

“That is why you have seen a faster or larger increase in the dryland values. And competition from the neighboring states has driven that up.”

Not too surprisingly, pasture land values saw the smallest average increase on the national scale. At a country-wide average of $1,200/acre for 2013, average values only increased 4.3 percent in 2013 compared to 2012.

The highest dollar values were again in New England, but in more western states, Illinois and California took the pasture cake. Illinois had average pasture land values of $3,700/acre for 2013, and California saw average pasture land come in at an average of $2,800/acre.

On the other side of the spectrum, it’s harder to say which state had the lowest average pasture values as some suspect states—Arizona and Nevada—had insufficient sales reports to determine a trend. Of the states with data, New Mexico was again the lowest, with pasture values of $350/acre. New Mexico still has 67 percent of its pasture/rangeland rated poor or very poor according to the most recent Crop Progress report. This is a fair improvement over the recent past were almost all of the state’s rangeland was poor or very poor, but it is still off of the U.S. average of 26 percent at poor or very poor.

Again, the Dakotas took the position of largest increase in average pasture land values. At $630/acre, North Dakota’s 2013 average pasture lands were 28.6 percent higher than the previous year. South Dakota, at $710/acre, was up 20.3 percent.

On the topic of the impressive year-to-year increases seen in the Dakotas, Kusel had an entertaining answer.

“I can tell you exactly why that’s happening. You’ve heard of the Bakken oil fields?” Kusel explained that, because of the oil fields, “the farmers have money to spend.” He also pointed out that, because people have the money, they are more willing to spend it.

“It’s not because of a value increase, but there’s just so much oil money up there, people are spending it.”

When asked if this is the precursor to a regional land bubble situation, he laughed.

“Everybody asks that,” he said. The issue of land bubble potential is a common concern. “The first statement that comes out of the older farmers is, ‘don’t these people remember the ´80s?’” After describing the issue of the late ´70s and early ´80s, where land prices were high, rising, and there seemed no end in sight to the upward movement, he pointed out that 2013 is not the ’80s.

“Here’s the one difference that I see; we are in a totally different environment today. What we have right now is the majority of the land sales we do today doesn’t involve a bank. But right now it’s mostly cash. And it goes back to ‘if they have it they are going to spend it.’” Kusel also pointed out that the movement of land in many areas of the West is simply not what it used to be. Without the volume of sales, there is a shortage of available land to buy, thereby driving up the prices for those who are looking to get more land.

“We’re at a low supply which is causing a high demand.”

He also explained that another financial mindset in the ag community— never pay taxes if you don’t have to—is contributing to the shortage of properties available for sale. Even though the high land values in many states make the potential of selling out, particularly for those older producers who want to retire, an attractive one, the reality that that high sale ticket comes with a high capital gains tax bill is keeping many people from selling.

Kusel continued on this topic, pointing out the current rent prices for ag land make the prospect of selling, paying capital gains taxes, then trying to invest elsewhere a less than attractive situation.

“A rent check from that land is better than selling and trying to draw interest from that money.” — Kerry Halladay, WLJ Editor