Farmland Market Review

March 01, 2013

Last year, I started the 2011 Farmland Market Review with the question “Is there any fuel left?” Not only was there fuel left in this farmland market, but it was high octane!! The average price of high quality farmland at the end of 2012 was over $12,000 per acre. This is a 17 % increase over the 2011 ending value of $10,432.

An understandable position to take on farmland values for 2012 would have been a softening in values, due to experiencing the worst drought since 1954. However, the drought conditions, which reduced production levels, resulted in higher commodity prices for 2013. Add in the crop insurance safety net and net income for 2012 was supported, resulting in stable to higher cash rent levels for farmland in 2013 (higher incomes support higher land values).

When will the increase in farmland values slow down or even recede? I believe interest rates are the number one driving force. When interest rates rise, there will be three factors that will impact farmland values.

  1. Alternative investments --- Higher interest rates result in higher rates paid on Certificate of Deposits.
  2. Increase in operating cost --- Currently, a farmer’s operating loan interest is a marginal expense item. This expense could easily double. Theoretically, this would reduce the amount of rent a farmer would be willing to pay.
  3. Increase in land borrowing cost --- Mortgage loans are at all-time lows; 4% interest for a land loan of $12,000 per acre is $480 per acre. If interest rates were to increase to 8%, the same purchase price would generate an interest expense of $960 per acre.

Commodity prices are definitely an important factor in farmland values, but the bottom line is that, as long as interest rates remain low, farmland values should remain strong. Interest rates will rise in the future, but by how much and when is a big question. The federal government has stated that interest rates will be held down for an extended period of time (probably through 2015). Even at these higher values of farmland, cash returns of over 3% are obtainable. Based on low interest rates and high commodity prices, land values should be well supported in 2013.

Central Illinois farmland values have increased approximately 17% (based on the following table) and provided a 3-4% cash return. The average value of the sales documented is $12,179 per acre. Following is a table of 39 sales in 12 counties. The sales were all good to high quality farms.

Since gold has been receiving a lot of press recently due to the perceived inflationary hedge it provides, I have provided a graph that compares gold to Central Illinois farmland. The chart illustrates that the correlation between gold and farmland values is fairly strong. Farmland can provide the safety of gold, and at the same time, provide an income stream.

We are very active in rural real estate brokerage*. If you have an interest in buying, selling or exchanges of farmland, please feel free to contact Jim Schroeder, Dale Kellermann, Seth Baker or Bruce Huber.

We keep abreast on many of the current issues facing rural landowners, these trends and topics are highlighted in our “Field Notes” newsletter. Below are some key topics for owners and farmers.