Iowa farmland values have declined three consecutive years for the first time since the 1980s farm crisis, according to an Iowa State University (ISU) survey released last week.
The drop is notable, but isn’t an indicator of a pending economic collapse, said ISU economist Wendong Zhang, who coordinates the annual ISU farmland value survey.
"What we are seeing is a number a lot of people expected," he said, noting that 75 percent of experts responding to last year’s survey expected land values to continue falling. "This decline is not a doomsday scenario. We probably won’t see a replay of the 1980s farm crisis."
The statewide per acre value fell $450, or 5.9 percent, since last November to an average of $7,183 per acre, according to the ISU survey. Farmland values have plunged more than 17 percent since hitting a historic high of $8,716 per acre in 2013.
However, the likelihood of another farm crisis is low due to significant farm income accumulated before the downturn, a stronger government safety net and an overall lower debt level among farmers, Zhang said.
"It seems scary that the land market has declined for three years in a row, but we declined from a peak," he said. "The golden era of phenomenal growth in farm income and land values, as we saw from 2006 to 2013, is behind us. The land market is going through an orderly adjustment."
Today’s farmland values are still 173 percent higher than 2004, Zhang noted. Average farmland values grew by double digits for five consecutive years starting in 2004, driven by several factors including the ethanol boom and historically-low interest rates. By 2013, average values were more than 230 percent higher than 2004 values.
Commodity price slump
The most common reasons cited for the declining land values were lower prices for crops and livestock, high input prices, lower cash rental rates and a weakening global economy, said Zhang. Unlike some previous cycles, when crop and livestock prices balanced each other out, farmers are facing low prices across all commodities this year, he pointed out. Dairy prices, hog prices and cattle prices all declined more than 30 percent in the past two years.
"For a pessimist, there are reasons to worry, especially for landowners or producers who are overleveraged," said Zhang. "For an optimist, this decline is still modest and the probability of a replay of the 1980s farm crisis is low. I think it will be more like the 1920s with a long, drawn-out downturn rather than a sudden drop."
There is some strength underlying the farmland market due to less land available for sale, Zhang said. Some 61 percent of survey respondents said there was a decrease in sales activity this year, the second highest number in the past 30 years. The limited sales activity, which is typical for down years, is helping support prices, Zhang said. Other positive factors supporting land values are low interest rates, strong crop yields and strong demand, he said.
Sales from estates
More than half of farmland sales are from estates and 23 percent are from retired farmers, according to the survey. Active farmers remain the primary buyers, accounting for 72 percent of farmland purchases. Iowa’s corporate farming laws make it harder for big investment funds to purchase farmland compared to other states, Zhang said.
"It’s local farmers buying local land," he said. "Even the investors are not buying to flip farmland. They tend to hold it for 10 to 20 years."
All nine Iowa crop reporting districts showed a decrease in farmland values. Plymouth and Sioux Counties reported the largest dollar decrease in values at $747 per acre, and Monona County had the largest percentage decrease at 8.4 percent.
But there are still strong sales happening in certain areas, including a parcel in northwest Iowa that recently sold for $15,000 per acre, Zhang reported. "It shows at least some farmers have some working capital to work through," he said.
Northwest most valuable
The highest average land values remained in the Northwest district at $9,423 per acre, while the lowest values were reported in the South Central district at $4,241 per acre. West Central Iowa had the largest district-wide decrease at 8.7 percent.
Low quality land in the Southwest and South Central districts were the only areas to show an increase in average values, reporting gains of 2.9 and 5.2 percent, respectively. The gains were due to strong recreational demand and high Conservation Reserve Program payments, Zhang said.
The ISU survey results are consistent with reports from the Chicago Federal Reserve Bank, Iowa Realtors Land Institute and the U.S. Department of Agriculture, Zhang said.
"We agree on the direction. In general, what you’re seeing is a consistency in all surveys that show land values continue to adjust lower," he said
Looking ahead, land values might continue to adjust downward in the next year or two, Zhang predicted.
"This is consistent with the stagnant corn and soybean futures prices and potential rise in interest rates," he said. "However, many respondents to the ISU survey are hoping for the market to rebound in three or four years."
The declining land values will lead to lower cash rents over time, but there tends to be a lag between land values and rental rates, Zhang said. "Cash rent is very sticky, because it only takes two bidders to make the landowner happy," he said.
Complete survey results, including charts and interactive maps showing land value trends over time, are available online at www.card.iastate.edu/farmland.