Despite persistent drought and odds for weaker earnings down the road, Nebraska land values continue to rocket upwards. Clouds on the economic horizon, however, signal a leveling off in land values soon and perhaps a softening within the next three years.
The current contrast of drought and buyers bidding up land prices has Bruce Johnson, University of Nebraska ag economist, shaking his head. "If you look at the U.S. Drought Monitor map, Nebraska is the epicenter of the drought," he says. "But it has been the epicenter of the land boom the past few years, too."
The preliminary 2013 Nebraska Farm Real Estate Market Development Survey, released this week, shows the Nebraska's all-land average value rise 25% over the 12 months, ending Feb. 1. 2012.
The 2013 all-land value of $3,040 an acre is more than double the value just three years ago, in early 2010, according to Johnson, who coordinates the annual land values survey. "Few would disagree that this period has clearly been a land boom," he says.
While there were gains in all farmland classes from a year ago, the variation across classes of land and regions of the state was stark.
Center-pivot irrigated land classes in Nebraska were generally strong in every region, showing a big jump of 27% statewide and an average of $7,415 an acre statewide. "Drought conditions no doubt buoyed up market demand for irrigated cropland," he says. "Income flows from irrigated land have been phenomenal in recent years. It was no exception in 2012. The combination of favorable irrigated crop yields plus widespread drought across the nation's Corn Belt fueled high commodity prices."
In the southern districts of Nebraska, there were significant jumps over a year ago in both center pivot and gravity irrigated cropland, in the range of 34 to 38%. (Gravity irrigated acres today represent only 20% of the state's total irrigated land, however.)
Johnson, referring to the limited amounts of irrigated land in southeast Nebraska, believes a few major land purchases may have skewed slightly the statewide percentage increase in irrigated land values.
Water availability or lack thereof has become a significant driver of land values in Nebraska. Natural resources districts have shut off well drilling in half of Nebraska and at least five of the 23 NRDs have some type of pumping allocation in place. "The presence of water moratoriums across much of the state precludes irrigation development, even if groundwater sources exist. But bidding is spirited when there is irrigation water available, Johnson says.
"It's a scary market in a way, where buyers are out there looking for water," he adds, referring to the possibility of irrigated acreage topping out in Nebraska.
Dryland crop values also varied greatly across the state. In the northwest and north districts, the value gains were under 10%, while values reported were more than 30% in the south and southern districts.
Drought has taken a heavy toll on forage production in Nebraska—reducing it by 50% or more during the 2012 grazing season. Even so, rangeland and pasture values still rose. "Forage shortfalls for cattlemen may have actually caused a more spirited bidding for additional land just to maintain their cow numbers," he speculated. "Unfortunately, even if the drought ends quickly, it may be several years before gazing capacity may be able to return to pre-drought levels."
He's heard of some ranchers drilling wells to irrigate alfalfa or other forages to make up for the drought-induced forage shortage.
In compiling this year's survey, Johnson heard on many occasions from his survey reporters that land prices being paid seem over-optimistic. "When asked what they expected land value movements to be for the remainder of 2013, as well as out three to five years, the vast majority saw a market which had topped out with little if any upward movement in the near futures. In fact, a sizable number of reporters thought values could weaken somewhat in the next few years."
Johnson is somewhat unsettled by what he sees as potential low rates of return for high-end auction sales, particularly in parts of southern Nebraska. He cited sales of irrigated land approaching or exceeding $12,000 an acre.
For the full report, go to agecon.unl.edu and click on the Cornhusker Economics for March 21.
The preliminary 2013 land values survey findings show cropland cash rental rates up from 2012.
For eastern Nebraska, dryland cash rental rates average about 8% above a year ago, but rates in the rest of the state rose 5% or less.
"These increases were much below the annual rises of the past few years, no doubt reflecting the seriousness of soil moisture deficits going into the 2013 crop year," says Johnson.
Rental rates for center pivot irrigated cropland for 2013 were about 13 to 15% above a year ago. However, reported rates for above-average quality pivot-irrigated land were more than $400 across the eastern third of the state. "The value of water in rain-deficit periods, particularly with the efficiency of center pivot technology, is clearly being reflected in these rates. Rates for gravity-irrigated cropland are generally 2 to 3 percentage points lower."
Pasture rates, on a per-acre basis, moved up in 2013 in most regions. Last year's forage production shortfalls with depleted carryover stocks into this year, according to Johnson, has sharpened the market for pasture, even with lower grazing output expected this year.
On a cow-calf pair, per month-basis, rates were up from a year earlier in all regions, with most showing gains of 3 to 6%.
As Johnson reviewed the most recent report, he offered these final points:
"Comparing the recent percentage gains in value of ag land classes with the associated lower percentage gains in cash rental rates indicate a continuing pattern of lower rent-to-value ratios associated with all farmland classes, he says.
"At some point, the implied economic returns to land as a percent of value can fall to a point where market participants say 'enough' and no longer bid values higher. Here in Nebraska, we well may be soon reaching that point."