We could be headed for a significant correction in Midwest farmland values, ag experts and economists warn. Average Midwest land values decreased slightly from 2014-16. They stabilized somewhat in 2017 before showing signs of decline again in 2018. Low commodity prices and reduced farm profitability are largely to blame, they say.
We’re not currently headed for dramatic declines like we saw in the 1980s, but some warning signs linger which bankers will want to keep an eye on.
Iowa farmland values rose at an incredible pace from 2000 to 2013, with only one minor decline in 2009, according to a widely respected survey from Iowa State University issued each December. The survey is regarded as a good indicator of Midwest land values generally.
Iowa values declined significantly over the next three years: 8.9 percent in 2014, 3.9 percent in 2015, and 5.9 percent in 2016. This is the first three consecutive years of decline since the mid-1980s. The 2017 Iowa Farmland Value Survey showed an increase of 2 percent, or $143 per acre, compared to a year earlier, before a slight decline of 0.8 percent or ($62) per acre in 2018.
Overall, 2018 average farmland values in Iowa are 16.6 percent below the 2013 peak average land value of $8,716 per acre. Average 2018 land values increased in only two of the nine crop reporting districts in Iowa while decreasing in five districts. They stayed the same in two districts. The greatest increase was 3.8 percent in the south central district, while the largest decline was 3.6 percent in the neighboring southeast district. The northwest district reported the highest 2018 average land values in Iowa at $9,311 per acre. There continues to be a limited supply of land for sale in many areas of the state.
Trends in farm land values in Southern Minnesota are probably fairly close to the trends shown in the Iowa land value survey, reflecting the lower crop prices and tighter profit margins in recent years. Land values in many portions of southern Minnesota stabilized in 2017, before declining in 2018. In addition to low profit margins, 2018 corn yields were the poorest in decades for many Southern Minnesota farm operators. Overall land value trend in the past 4-5 years has been a decline of 10-18 percent from peak land values in 2013 and early 2014.
One of the best sources of farm real estate values in Minnesota is the University of Minnesota’s Land Economics website. Updated annually after Sep. 30, it has a database of land values based on annual valuations reported to the State Revenue Office by county assessors’ offices, which are adjusted annually based on actual land sales.
Based on potential returns from crop production, current land values should probably be much lower than current levels. In recent years, many farm operators have purchased farmland as an opportunity investment, using returns from existing debt-free farmland to subsidize cash flow and debt payment ability on the newly purchased farmland. Others have purchased farmland as a long-term investment, realizing that current cash rental rates in most areas will lead to poor annual rates of return at the present.
The relative stability in Midwest farmland values is primarily why fewer farm operations are discontinuing due to financial collapse or bankruptcies. Continuing low profit margins in crop production and most livestock sectors, however, is increasing their financial stress. Farmland values account for over 80 percent of total assets in the U.S. ag industry. During the ag crisis of the 1980s, average farmland values declined by over 60 percent from 1981 to 1986, which led to many bankruptcies and foreclosures.
Currently, there are no signs on the horizon of a similar dramatic decline in land values. Some caution flags linger, however that could put further downward pressure on land values in the coming 12-18 months:
Many areas of the Upper Midwest experienced above-average corn and soybean yields in 2016 and 2017, which seemed to stabilize land values in 2017 and early 2018. However, greatly reduced crop yields in many portions of southern Minnesota and northern Iowa in 2018, together with continued low commodity prices, appear to be putting more downward pressure on land values.
Future trends in crop prices, the level of 2019 crop yields and profitability in livestock production will all determine if land values continue to stabilize this year or not. Expect considerable variation in future land values based on location, land quality, amount of tile drainage and local buyer interest.
Download, print, and display ICBM’s Farm and Rural Helpline Flyer.