Where are farm land values going in the future?

Nov 22, 2013

The options are of course up, down or stay the same. But since one of the few constants in life is that things don’t stay the same, that just leaves two options. Which one it is, however, is contested.

On the one hand, the most recent Land Values report from USDA’s National Agricultural Statistics Service showed overall farm real estate value—which includes the value of all land and buildings on farms—averaged $2,900 per acre for 2013, up 9.4 percent from the revised 2012 values.

As must be expected, regional trends differed from the national average. For instance, Southwestern states saw a flat lining of land values. Conversely, in the Corn Belt, land values increased over 23 percent from 2012 to 2013.

While the USDA report documents what has happened, the presenters at the recent National Agricultural Bankers Conference discussed what they expect will happen in the future. The almost unanimous expectation was that land values are heading down in the next few years.

“There is some sentiment out there with those in the lending industry that longer term land values will go down,” Dr. Allen Featherstone, Professor of Agricultural Economics at Kansas State University, told WLJ. Featherstone was one of the presenters at the National Agricultural Bankers Conference and one of the many who cited expectations of declining land values.

Featherstone talked about a Kansas State University survey of agricultural lenders. In the most recent fall edition of the survey, researchers asked lenders what they expected of land values in the next few years.

“The bankers we talked to in this nationwide survey indicated land values went up over the last three months [since the August USDA Land Values report], but then as they think about the future, their expectation is that over the next year they are going to flatten.”

Featherstone explained regional differences exist. For instance, surveyed lender expectations for Plains land values was a slight increase, while for the Corn Belt regions slight declines were expected. When taken together, they end up being fairly flat.

“But then if you look at longer term, about two to five years, there is evidence that land values will go down.”

In answer to why, corn was a big answer. The 2013/2014 corn crop is expected to be a record production year. Combining that with the potential for reduced Renewable Fuel Standards requirements (see Traci Eatherton’s story on the cover of this week’s issue) makes for a bountiful domestic supply. And that reduces prices for corn. That, in turn, reduces the income generated by the land, and that can lead land values lower.

“There is going to be a strong correlation between the income-generating capabilities of land with the value of land,” said Featherstone, summarizing the interaction. “When income generated from that land goes up, the price of land will go up. If the income goes down, the price of land will tend to go down.”

Other crops such as soybeans and wheat also are seeing similar movement, despite corn getting much of the attention.

Another related topic that Featherstone voiced concern about was what he called a diminishing “safety net” regarding ability to pay interest on farmland loans.

“It’s always been argued that the crop insurance programs and crop revenue programs have been so good for maintaining the safety net.”

However, since the crop insurance programs are set annually based on certain contracts of the futures market, the quality of that safety net can change from year to year. Featherstone gave the example seen in Table 1 between the Crop Insurance Minimum Revenue Guarantee for the 2012/2013 corn crop and the current 2013/2014 crop.

“So you have roughly $130 less coverage. You don’t have as much of a safety net. There isn’t the downward protection on incomes and also land values as there had been previously.”

Featherstone, along with many of the other presenters at the conference, acknowledged that regional differences and unique land qualities exist and cannot be ignored when it comes to land values. The projection of declines in the next few years is general, and averaged across the country, though many of the presenters looked at regions such as the Corn Belt, greater Midwest, and Plains states. — Kerry Halladay, WLJ Editor