The average value of Iowa farmland is estimated to be $8,296 per acre, an increase of 23.7% from 2011, according to results of the Iowa Land Value Survey, released December 11. The statewide annual survey was conducted by Iowa State University Extension and Outreach in November. This is the third year in a row where values have increased more than 15%. The 2012 values are historical peaks.
Iowa State University economist Mike Duffy directs the widely-followed survey of real estate brokers and other selected individuals who are knowledgeable about farmland values in Iowa. Duffy, a professor of economics and an Extension farm management economist, released the results and explained the survey and shared his thoughts and opinions during a press conference December 11 at Ames.
Duffy notes that this survey shows a somewhat larger increase than some other recent surveys of farmland values for 2012 in Iowa. For example, the Chicago Federal Reserve Bank estimated an 18% increase in Iowa land values from October 2011 to October 2012 and the Iowa Chapter of the Realtors Land Institute estimated a 7.7% increase from March to September 2012.
Why does ISU survey show a higher increase in farmland values than other surveys?
"The difference in survey estimates could be due to values increasing more rapidly in the past few months than earlier in the year. Better than expected crop yields and the level of land sale activity due to the proposed changes in land related taxes contributed to the increasing values," says Duffy. "Our Iowa State survey samples different populations, and uses different wording than the other surveys. This could also lead to different results especially in times of uncertainty. Even within the Iowa State survey there was considerable variation in the estimates."
O'Brien County had an estimated $12,862 average value, the highest average county value. O'Brien County also had the highest percentage increase and highest dollar increase in value, 35.2% and $3,348, respectively. Osceola, Dickinson and Lyon counties also saw 35.2% increases. The Northwest Crop Reporting District, which includes all four counties, reported the highest land values at $12,890, an increase of $3,241 (33.6%) from 2011.
"The 2012 land value survey covers one of the most remarkable years in Iowa land value history," notes Duffy. "This is the highest state value recorded by the survey, and the first time county averages have reached levels over $10,000. While this is an interesting time, there is considerable uncertainty surrounding future land values."
There are several reasons why Iowa farmland values are continuing to increase
Duffy says understanding some of the causes for the current increase in farmland values is helpful in assessing the situation. Farmland values are highly correlated with farm income. As farm income increases, so will land values. In 2005, corn prices averaged $1.94 per bushel in Iowa. The preliminary estimated price for November 2012 is $6.80 per bushel. Soybean prices changed from $5.54 to $13.70 over the same period. Coming into 2012 there was a general sentiment that prices would decline from their peaks. But, the drought changed that scenario and grain prices remained at high levels in 2012. How long the high prices will last is unknown.
There has been considerable variation in commodity prices over the past few years, but farm income has increased substantially. The ISU economist goes on to say, the increase in income has been the primary cause for the increase in farmland values, but not the only one.
"There are other causes for the increase," Duffy explains. "Interest rates are at the lowest level in recent memory. The amount of the farmland purchased by investors went from 18% in 1989 to 39% of purchases in 2005, but investor purchases are back to the 1989 level of 18% this year after decreasing for the third year in a row."
Keep in mind the factors that influence farmland values, be watchful of these drivers
Another key component is the costs of production. In the past, costs have risen in response to higher commodity prices. This is especially true for rents. ISU economists estimated costs of crop production have shown a 61% increase in the cost per bushel since 2005. Without land, the increase has been 87%.
Duffy believes there is still discipline in the land market, while land values have increased 64% in the past three years, in 2009 values did decrease by 2.2%. "Therefore, it is prudent to be mindful of the factors that influence land values," he notes. He says there are several key components to watch:
*Weather related problems – both here and around the world
* Government policies – especially policies related to estate and capital gains tax rates
* The amount of debt incurred with land acquisition
* What happens to input costs – land being the residual claimant to any excess profits in agriculture
* Government monetary policies as they relate to inflation and interest rates
* The performance of the U.S. economy and economies throughout the world – which impact commodity prices, which in turn impact land values
Overview of 2012 Iowa farmland values—highest values are in northwest Iowa, lowest values are along Iowa-Missouri border
While the highest county land values were reported in O'Brien County, Decatur County remained the lowest reported land value with $3,242 per acre, and the lowest dollar increase at $521. Keokuk and Washington Counties in southeast Iowa had the lowest percentage increase, 14.8%, with reported average values of $6,330 and $8,226, respectively. The drought of 2012 hit hardest in southeast and south central Iowa, which has softened the bidding somewhat for land in those areas, notes Duffy.
Low grade land in the state averaged $5,119 per acre and showed a 20.2% increase or $862 per acre, while medium grade land averaged $7,773 per acre; high grade land averaged $10,181 per acre. The lowest land value was estimated in the South Central Crop Reporting District at $4,308, while the lowest percentage increase was in the Southeast Crop Reporting District with an 8.2% increase. The Northwest Crop Reporting District reported a 36.8% increase, the highest district average percentage reported.
How long will land prices continue to rise? Or is this a bubble that's about to burst?
At the December 11 press conference at ISU in Ames, Duffy said he didn't think Iowa farmland values were vulnerable to the kind of steep dive, such as those that occurred during the 1980s farm financial crisis. That steep and continued drop in farmland values followed a land and commodity boom in the 1970s similar to the boom of recent years.
Duffy says that among the factors that could cause land prices to soften in the future could be increased crop production in South America, Central Asia, Ukraine and some other countries. Those areas of the world have become strong grain exporting regions. If their production keeps growing, that would increase world grain supplies and reduce the export demand for U.S. produced grain.
"The world is gearing up for more production," cautions Duffy. "So it's a question of when, rather than if, supplies of grain increase and crop prices decline significantly. But getting that increased world production might take a couple of years."
More information on land values, comparisons to past survey results available
Maps showing 2012 land values, percentage change and comparisons to 2011 data and additional information from Duffy are available on the ISU website. Maps (for Web viewing) include the following (click on the word "Map" to select which map you want to view):
Map 1: 2012 and 2011 Iowa Land Values, by county
Map 2: Percentage Change in Iowa Land Values, 2011 to 2012
Map 3: 2012 Iowa Land Values, by Crop Reporting District
Map 4: Percentage Change in Iowa Land Values, 2011 to 2012 (ranking)
Map 5: 2012 Iowa Land Values (dollar ranking)
The Iowa Land Value Survey was initiated in 1941 and is sponsored by the Iowa Agriculture & Home Economics Experiment Station, Iowa State University. Only the state average and the district averages are based directly on the ISU survey data. The county estimates are derived using a procedure that combines survey results with data from the U.S. Census of Agriculture.
The survey is based on reports by licensed real estate brokers and selected individuals considered knowledgeable of land market conditions. The 2012 survey is based on 486 usable responses providing 663 county land value estimates. The survey is intended to provide information on general land value trends, geographical land price relationships and factors influencing the Iowa land market. It is not intended to provide an estimate for any particular piece of property.