Drought-weary farmers pump up land values

Oct 11, 2013
by DTN

It sounds counter-intuitive, but Great Plains irrigated farmland—not old reliable standards, like Iowa and Illinois—has been appreciating at the fastest warp speed the last few years. That’s despite a multi-year drought and high pumping demand that has led to serious concern for the Texas Panhandle and even water table declines of 10 to 15 feet in parts of Kansas.

“Mark Twain said, ‘Whiskey is for drinking and water is for fighting over,’” Farmers National’s Iowa Area Sales Manager Sam Kain likes to say. The farm realtor is a natural booster of rain-fed Iowa farmland where some of the world’s best soils brought $17,000 per acre at auction last week, but where drought is rarely a problem.

“You’ve got to be surprised about how well Nebraska and Kansas irrigated land values are holding up in comparison to the best rain-fed soils of the Midwest,” Kain said.

In the Great Plains, higher corn prices have skewed revenue returns between irrigated and dryland farms.

Between 1975 and 1999, the gross return for groundwater on corn ran only 0.4 percent, a Kansas State University economics study found. Between 2000 and 2011, that average return jumped to 9.7 percent.

That extra profit incentive sent farmers and investors on the hunt for land with potential for irrigation. Near Kinsley, KS, for example, irrigated land with no equipment is selling for about $6,000 to $6,200 per acre, up from about $1,800 per acre only four years ago. At midyear, Federal Reserve banks reported that irrigated land has again surged 33 percent year-over-year in the Mountain States, 23 percent in Nebraska and 30 percent in Kansas. In contrast, Iowa values jumped only 18 percent in that same period. Realtors and farm lenders say values for quality farmland continue to advance and markets have yet to see a retreat from record highs.

Land overlying the Ogallala Aquifer, which encompasses more than 170,000 total square miles, supports both crop and livestock production, not only in western Kansas, but also in the seven other states it touches, from South Dakota to Texas. But a recent study by David Steward, a professor of civil engineering at Kansas State University, and a team of researchers, found that if current usage of the aquifer continues, as much as 69 percent of the aquifer would be depleted by 2060. Texas Tech University geospatial technology projections show irrigation agriculture is in serious jeopardy in the Panhandle. Parts of the region won’t be able to support irrigation by 2030, it estimates.

Potential scarcity is making investors scrutinize water availability closely in regions where water tables might lapse or where local governments have not stepped in to ration the resource. “The Ogallala can run hot and cold—robust and recharging in some areas and others declining at a predictable pace,” said John L. Taylor Jr., managing director of U.S. Trust. The Dallas-based farm manager operates 950 farms and ranches from Texas north to the Corn Belt. It hasn’t “redlined” acquisitions yet based on water availability, Taylor said, but it uses “an abundance of caution.”

“We have to do more due diligence on the quality of equipment and whether the aquifer is sustainable. We don’t want to pay for one thing and end up with a nonirrigated farm 10 years later,” Taylor said.

Mandatory water restrictions in some states and new technologies are parsing out water more carefully now, as DTN’s recent “Stretching the Ogallala” series reported. That’s keeping values for some irrigated farms afloat.

Theoretically, less water should mean less revenue, but that hasn’t always materialized. Preliminary studies of areas with serious Ogallala Aquifer depletion show irrigated farmers have been more adaptable than first thought, said Bill Golden, an economist with Kansas State Extension.

Fifteen years ago, economists predicted huge negative impacts as water use in west-central Kansas was cut by 30 percent virtually overnight, Golden said. Between 1990 and 2005, Kansas’ Groundwater Management District No.1 experienced a reduction in irrigated crop acres of approximately 44,500 acres, or 17 percent. But while farm incomes plunged at first, slowing the spigots resulted in no statistically significant farm revenue losses in the long run, Golden found.

Some became better dryland farmers, but growers also adopted technologies and practices to stretch their resource, Golden said. Today, adoption of sub-surface irrigation alone is “revolutionary” and curbing water use 30 percent, he noted.

Over time, producers have retired flood-irrigated land, quit irrigating low-profit crops such as wheat and sorghum and switched to waterconserving systems such as center pivots and drop sprinklers. More recently, droughttolerant seed technology has also enhanced water conservation options.

While Golden thinks some parts of western Kansas and Nebraska remain good irrigated investments, he has urged his business partners to sell their interests in the Texas Panhandle. “Half of our wells near Dalhart are running at 100 gallons per minute now,” he said, down from 1,000-gallon and 500-foot depths in the past. “We probably have only about 10 years of water left there,” Golden said. “We need to learn how to farm dryland, but that could take rents from $300 an acre to only $60.” And land values with them. — Marcia Zarley Taylor, DTN