Focus on Ag: Land values increasing in 2021

Kent Thiesse
Farm Management Analyst and Vice President, MinnStar Bank

Farm land values in the Upper Midwest appear to be making a bit of a correction after several years of uncertainty.

Improved crop prices in recent months, higher levels of government program payments and improved crop yields in some areas helped boost final 2020 farm income levels compared to recent years. Land value summaries showed that a reduction in average land values occurred in many regions of the U.S from 2014-2016 before stabilizing in 2017 and early 2018.

Land values were under pressure in some areas in 2018 and 2019 due to reduced crop yields, the ongoing trade war with China and low commodity prices. Now, it appears that land values have stabilized and even begun to increase in some areas due to improved farm profits, relatively low long-term interest rates, a limited supply of land being offered for sale and relatively strong buyer interest.

Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farm land sales. Iowa farm land values rose at an incredible pace from 2000 to 2013, with only one minor decline in 2009 before more significant declines in 2014, 2015 and 2016.

Average farm land values in Iowa declined from a peak of $8,716 per acre in 2013 to $7,183 per acre in 2016, representing a 3-year decline of 17.6%, or $1,533 per acre.

From 2017 to 2020, the Iowa Farmland Value Survey showed a slight increase each year except 2018, increasing by 3.5% from the low point in 2016. Average land values in Iowa in 2020 increased by $127 per acre, or 1.7%, from the previous year.

The average 2020 land values increased in eight of the nine crop reporting districts in Iowa, as compared to 2019 average land values, while decreasing in only the Southwest District. The greatest increases in average land values were +3.9% in the West Central District and +3.8% in the South Central District. The Northwest District reported the highest 2020 average land values in Iowa at $9,536 per acre, followed by the East Central District at $8,524 per acre and the Central District at $8,485 per acre.

Trends in farm land values in Southern Minnesota are usually fairly close to the trends shown in the Iowa land value survey for northern crop reporting districts in Iowa. Similar to many areas of Iowa, land values in most portions of Southern Minnesota seemed to stabilize in 2017 before declining slightly in 2018 and 2019. In addition to low profit margins, 2018 and 2019 crop yields in the region were among the poorest in several years for many farm operators. Crop yields in many portions of Southern Minnesota were much improved in 2020, which together with higher commodity prices have helped strengthen land values in many areas.

There have been some isolated land sales across Southern Minnesota at fairly high values per acre; however, the overall land value trend in recent months appears to be steady to up slightly from a year earlier, but still well below the peak land values of 2013 and 2014. In the past few years, there has been an increasing gap in the average land price for high quality, well drained farm land, compared to low quality, poorly drained land. There also continues to be a limited supply of land being offered for sale in many areas of Southern Minnesota.

One of the best sources of farm real estate values in Minnesota is the University of Minnesota’s “Land Economics” website at: https://landeconomics.umn.edu/. This web site is updated annually in October and accesses a data base of various land values based on farm land valuations reported to the State Revenue Office by County Assessors Offices throughout the state each year, which are adjusted annually based on actual land sales in a given county. This website allows for selected sorts by county, state economic regions, Watersheds etc., as well as by land type.

Based on crop production returns from 2015 to 2019, land values in the Upper Midwest probably should have declined by a much larger margin than actually occurred during those years. In recent years, many farm operators have purchased farm land as an “opportunity investment”, using returns from existing farm land that is “debt-free” to help subsidize the cash flow and debt payment ability on the newly purchased farm land. Similarly, investors have purchased farm land as a long-term investment, accepting current cash rental rates as a desirable annual rate of return.

Most economists point to the relative stability in farm land values in the Midwest as the primary reason that we did not see more farm operations discontinuing due to financial collapse or bankruptcies in recent years. Profit margins in crop production have improved for many farm operators in 2020 and 2021; however, profit margins in the livestock sectors continue to be a concern. Farmers are wondering if the improved farm income trends will continue into 2021 and beyond, when there will likely be lower levels of government program payments. The value of farm land accounts for over 80% of the total assets in the U.S. agriculture industry.

Land sales during the first two months of 2021 have continued to be quite strong, with some isolated per acre sales at high levels that we have not seen in recent years; however, most sales are showing more modest increases.

Increased activity in farm real estate sales is being driven by farm operators that are taking advantage of improved farm profits and low interest rates to expand their land base. Higher land values are also being driven by investors that are looking to re-position their financial portfolio due to uncertain financial times down the road. Both farmers and investors also want to take advantage of Section 1031 tax-deferred exchanges to replace any land that they have sold, due to concerns that changes in federal tax laws could limit this option in the future.

Currently, most signs point toward continued stability and potential further modest increases in land values over the next 12 to 18 months. However, there are some lingering “caution flags” that could potentially reverse this optimistic trend and revert to more downward pressure on land values. These potential challenges include:

  • Return to lower crop prices and lower profitability in crop and livestock farming
  • Slow-down of the ag export increases that have occurred under the new trade agreements
  • Increases in long-term interest rates by the Federal Reserve Bank
  • Changes in federal policies, such as estate taxes, capital gains taxes or 1031-exchange policies
  • Rapid increase in the amount of land being offered for sale along with reduced buyer interest
  • Lack of confidence in the land market by investors and ag lenders

Many areas of the Upper Midwest experienced above average corn and soybean yields in 2020. These strong yields combined with much improved crop prices have stabilized and even increased land values in many portions of the Upper Midwest.

Buyer interest at land auctions and through private sales has been quite strong in recent months. The future trend in crop prices, the level of 2021 crop yields and profitability in livestock production and potential changes in government policy will likely determine if there is further strength in land values later this year. Many farm operators and ag lenders are still quite cautious on farm land purchases following the very poor farm profit years from 2016 to 2019 across the region.

Kent Thiesse