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Farmland Values Hold Steady

Farmland values appear to have adjusted to a new normal. Even with seasonal fluctuations, farmland values have remained generally consistent since 2015.

“Farmland values are largely dependent on geography and have adjusted to reflect their market’s current supply and demand,” said Tim Koch, chief credit officer for Frontier Farm Credit, which tracks the values of 71 benchmark farms in association with Farm Credit Services of America (FCSAmerica).

Farmland values in FCSAmerica’s four states of Iowa, Nebraska, South Dakota and Wyoming peaked in the last half of 2013. Long-term data for eastern Kansas is not available because the alliance between Frontier Farm Credit and FCSAmerica dates only to 2015.

Nearly five years later, Iowa has seen the largest drop in values at 17.8 percent, followed by Nebraska at 17.6 percent. South Dakota’s farmland is off 10.8 percent since it peaked in the fourth quarter of 2013. (The five-year mark in the chart below reflects changes in farmland values since the first half of 2013, prior to the market peak. The number of benchmark farms in each state is noted in parentheses.)

STATE Six Month One Year Five Year 10 Year
Kansas (7) 2.1% 2.1% N/A N/A
Iowa (21) 2.1 3.5 -16.3 71.4
Nebraska (18) 0.1 -2.8 -12.0 109.3
South Dakota (23) -1.4 -2.6 4.2 98.6
Wyoming (2) 2.5 3.2 38.5 30.1

In the first half of 2018, four of the seven benchmark farms in eastern Kansas increased in value, two declined and one showed no change.

Frontier Farm Credit and FCSAmerica appraise benchmark farms twice a year, in January and July. In addition, the cooperatives compile records from farmland sale. The cooperatives’ objective in using the benchmark farms is to track real estate values without the influence of changes in land quality on sale prices. Below are quarter-by-quarter changes in sale prices for eastern Kansas:Kansas Cropland Values

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Farmland Values Stabilize in 2017 in Grain Belt States

Farmland values stabilized in 2017, a reflection of continued market demand for quality land in states served by Frontier Farm Credit and Farm Credit Services of America (FCSAmerica).

Sales of higher quality farm ground contributed to an uptick in average sale prices in 2017. Where prices dropped at local or regional levels, sales generally involved lower quality land. Average sale prices rose slightly in eastern Kansas, Iowa, Nebraska and South Dakota. Wyoming had too few sales to identify a trend.

FCSAmerica, in association with Frontier Farm Credit, compiles sales records and, twice a year, appraises 71 benchmark farms. The cooperatives’ objective is to track real estate values without the influence of changes in land quality on sale prices. Iowa and Wyoming saw modest overall increases in real estate values in 2017, while eastern Kansas, Nebraska and South Dakota declined.

Below is the average state-by-state change in benchmark farm values through 2017. The number of benchmark farms in each state is indicated by parentheses.

State Six Month One Year Five Year Ten Year
Iowa (21) 1.4% 1.8% -12.8% 82.1%
Kansas (7) -0.1% -3.2%
Nebraska (18) -2.8% -2.8% -5.1% 130.2%
South Dakota (23) -1.3% -3.1% 15.6% 123.3%
Wyoming (2) 2.5% 3.2% 38.5% 30.1%

“Overall real estate values have stabilized in the past year, but continued low profit margins and potential for an increase in sales activity could put downward pressure on real estate values,” said Tim Koch, chief credit officer for Frontier Farm Credit and FCSAmerica.

Farmland values remain well below the market’s peak of three to four years ago. Overall, values are off about 20 percent.

EASTERN KANSAS

One benchmark farm increased in value, four declined and two were unchanged. The 3.2 percent decline in overall value for 2017 was due largely to the sole irrigated cropland represented among the benchmark farms. The value on the irrigated ground dropped 21 percent. Frontier Farm Credit has been tracking farm values since January 2015, when it began operating in alliance with FCSAmerica.

Public land auctions declined 31 percent compared to 2016 and total sales were down 46 percent.

The average price on completed sales by quarter:

KS Cropland Values

IOWA

Eleven benchmark farms saw an increase in value in the last six months of 2017, while 10 showed no change.

Overall farmland sales activity was down 20 percent. However, public land auctions increased 2 percent compared to the previous year. The percent of auction sales fell to 2.7 percent, down from 3.2 percent in 2016.

IA Cropland Values

NEBRASKA

Five benchmarks farms increased in value, while two showed no change. The remaining 11 declined an average of 6.1 percent.

Total sales declined in 2017, with dry cropland dropping 15 percent and irrigated 25 percent compared to 2016. Public land auctions dropped 16 percent and auction “no sales” increased to 5.2 percent, up from 2.2 percent in 2016.

NE dryland Cropland Values

NE irrigated Cropland Values

SOUTH DAKOTA

Values were unchanged on 14 benchmark farms in second half of 2017. Three farms saw an increase and six declined.

Total sales were down 18 percent compared to 2016. Public land auctions were down 16 percent and “no sales” increased to 6.1 percent, up from 3.2 percent.

SD Cropland Values

WYOMING

The one cropland benchmark farm increased in value by 5.1 percent. The pasture unit saw no change in value in the last six months of 2017.

Sales have been and continue to be very limited in Wyoming.

Challenges of Today Present Opportunities for Tomorrow

The following was adapted from a speech Doug Stark, our president and CEO, made to young and beginning producers at the Progressive Farmer’s Ag Summit in Chicago.

We all know that agriculture is laden with risks, and managing them is a critical part of what producers do every day. But to manage risks you must actually take risks. That’s not always easy for young and beginning producers, particularly when it comes to one of their biggest hurdles – access to land.

At one of our annual Side by Side Conferences for young and beginning producers, three of our Directors – two of them still relatively young – were asked what they would do differently if they could go back and do it again. “Buy more land,” two of these successful farmers responded.

When I visit our customers, I hear this same regret. With great pride, customers show me their operation, its evolution and the land they added.

Then, inevitably, they point to the tract they should have bought.

Passing Up Opportunities

Now, I’m not encouraging producers to throw caution to the wind and plunge into debt to buy every piece of land for sale. Rather, the lesson is that these producers had opportunities they didn’t take and, with hindsight, recognized that they could have made them work.

Taking risks is foundational to growing your operation, especially for young producers. The key is to understand the risks and the steps needed to manage them.

Consider a drive I took with one of our Directors. He had a nice start on his operation and wanted me to see an adjacent tract. If he wanted to own it, he told me, he would have to pay a record per-acre price for his county. Understanding his apprehension, I posed a series of questions:

  • How long will you own it? “Forever,” he said.
  • Where will land prices be in 30 to 40 years? “Probably higher,” he acknowledged.
  • Can you make the payments? “Yes,” he said.
  • Even under two to three years of adversity? “I think so,” he said.

There were additional – critical – facts we didn’t explicitly cover that day, including his cost of production and how the new purchase would affect his fixed and variable expenses. He understood his financials, with and without the land purchase.

Commit to Your Goals

Other young and beginning producers will come across their own land opportunities in the next couple of years, either as the result of producers retiring, adjusting their operations or deciding to exit the business.

Also, some non-farming landowners looking at higher interest rates and declining land values will decide this is a good time to sell, and leased land will change hands as agriculture searches for a cash-rent balance.

Prepare yourself for these opportunities by asking: “What would it take if I . . .”

  • had to buy the farm I lease?
  • could add another lease to my operation?
  • wanted to double my operation in five to seven years?

After you identify how you can position yourself for opportunities, take the next step. Commit to your goals. This might mean doing things differently, sitting down with a broker to devise a better marketing plan or developing relationships with trusted advisors.

It has never been easy to get started in production agriculture. But I’d offer that despite today’s challenging conditions, there are going to be more opportunities than ever.

This is an exciting time to be in agriculture.

State-by-State Farmland Trends

The overall trend of weakening cropland prices continued through 2016 in the grain belt states served by Frontier Farm Credit and Farm Credit Services of America (FCSAmerica). However, the pace of decline remains slower than expected.

The large 2016 corn and soybean crops through much of the region helped profitably levels and contributed to continued demand for quality tracts, said Mark Jensen, chief risk officer for Frontier Farm Credit and FCSAmerica.

“That being said, overall margins remain tight and input costs still are adjusting downward,” Jensen said. “As a result, we anticipate continued pressure on real estate values.”

Frontier Farm Credit and FCSAmerica track all farmland sales in eastern Kansas, Iowa, Nebraska, South Dakota and Wyoming. Appraisal teams also update values on 71 benchmark farms every January 1 and July 1. The resulting data is the largest and most comprehensive snapshot of farmland values in the region.

Below are state-by-state trends based on land sales completed through Dec. 31, 2016:

While values on Iowa farmland had been dropping at a faster rate than in other states served by FCSAmerica and Frontier Farm Credit, the market stabilized somewhat in 2016, particularly in the last half of the year. The average 2016 price for an acre of Iowa farmland — $8,123 – was 2.8 percent lower than in 2015 — $8,370. Since the market’s peak in 2013, the average sale price is down 17.3 percent.

Public auctions dropped 3 percent in 2016 and completed sales were down 7 percent compared to 2015.

In eastern Kansas, farmland sold for 3.7 percent less in 2016 than in 2015 — $4,097 vs. $4,256 per acre. Prices are down 12.5 percent since 2014, when the associations began tracking farmland sales in the state.

Completed sales were down 12 percent compared to 2015.

KansasAvgCroplandValues2016

IowaAvgCroplandValues2016

In South Dakota, farmland prices gained ground in 2015 only to drop 8.6 percent in 2016 to $4,813 per acre. Since 2013, the average price of South Dakota farmland is off 14.8 percent.

The number of public auctions was similar to 2015. Total sales declined 8 percent.

SouthDakotaAvgCroplandValues2016

Nebraska’s average 2016 sale price for dryland — $4,432 per acre – was down nearly 4.8 percent from the previous year and 13 percent since 2013. The average 2016 price for irrigated Nebraska farmland — $6,805 per acre — was 6.6 percent lower than in the previous year and 9 percent lower than in 2013.

Public auctions were down 14 percent from 2015 and sales declined 18 percent.

NebraskaAvgDrylandCroplandValues2016

NebraskaAvgIrrigatedCroplandValues2016

Wyoming had too few sales to identify trends. The number of completed sales in Wyoming was 45 percent lower than in 2015.

The following table tracks changes in appraised values of the associations’ benchmark farms, beginning with the final six months of 2016:

State Six Month One Year Five Year Ten Year
Iowa (21) -0.8% -4.7% 3.4% 119.3%
Kansas (7) 0.1% -1.9%
Nebraska (18) -3.3% -7.6% 28.1% 184.5%
South Dakota (23) -3.2% -6.8% 57.5% 184.3%
Wyoming (2) 0.0% 7.8% 35.8% 62.7%

Preparing Your Game Plan for Cash Rent Negotiations

Two years of declining farm profits and the resulting impact on farmland values is anticipated to influence the upcoming season’s cash rent negotiations. For those entering negotiations in this economic environment, preparation will be key to successful agreements. Dr. David Kohl, professor emeritus at Virginia Tech, recently spoke at our annual Side By Side conference and offered a checklist to help tenants and landlords get organized ahead of negotiations.

  • Have a game plan. Between harvest and the new year, update your balance sheet and start developing a cash flow and breakeven analysis for the next growing season. This is powerful information for tenants because it allows them ask critical questions even before negotiations begin, including: Can I afford to pay cash rent on this land? Tenants who understand their cost of production also are better positioned to have meaningful discussions with their landlords.
  • Pay attention to land practices.  Landlords need to approach their farmland as an annuity, one which needs to be well tended for their future security. It might be tempting to go with the producer who agrees to pay the highest rent. But there can be real value in rewarding a tenant who understands the importance of keeping your grandparents’ farm looking nice. More and more tenants are focused on keeping the rented ground in top condition and keeping landlords informed some now even using drones to give their landlords an overview of what is happening on the land.
  • Set and share your goals.  Separately, tenants and landlords should write their one-, three- and five-year goals. This exercise will allow each side to discuss where goals are similar and where steps might need to be taken to prepare for change. For example, the landlord might be ill and plans to sell the land in the future. This would allow the two sides to discuss whether the tenant could one day buy the land. Or the tenant might plan to take on additional land and bring a daughter or son into the operation.  This could lead to a discussion about how additional operators would affect the landlord-tenant relationship.

Today’s agricultural economy requires a keen focus on costs, including land costs. But Dr. Kohl advises not losing sight of something more enduring than the current down cycle – successful working relationships between landlord and tenant.

“Often,” Dr. Kohl said, “it’s the intangibles that are more important than the financials.”