1. In 2006, there were 6207 real estate sales in the territory serviced by the Farm Credit Services of America district (IA, SD, WY, NE).  In 2011, the number dropped to 4434 sales, confirming that there is a lot less land available to buy.

2.  In 2009, the debt to asset ratio for district borrowers was 35%.  In 2011, the ratio actually dropped to 34% despite higher land prices.  In addition, the loan to collateral value over the same period dropped from 54% to 48%. This confirms that the balance sheets for farmers continue to improve.

3.  In 2008, farmers purchased 82% of the IA farms that closed.  This number dropped to 73% in 2011, thus indicating that investors are continuing to purchase land despite the higher prices.

4.  In 2009, 29% of the land sold at public auction while in 2011 this percentage increased to 50%.  Not coincidentally, most of the record sale prices have occurred at auction, as there are a number of aggressive buyers in the market looking to add to their land holdings.

I look at the underlying land issues listed above, and am more convinced that this rapid increase in farmland values has been driven by profits and not speculation.  At some point, prices will stabilize and there may be a period where the market experiences a short-term correction.  I just can’t buy into the “bubble is ready to burst at anytime” scenario that a few economists are still predicting.

One of the biggest surprises in the survey was the positive outlook of livestock producers, the result of lower grain prices coupled with higher livestock prices. For years, the livestock sector was battered while the grain farmers prospered and it appears that that trend has finally changed.

The attitude of grain farmers is a little more cautious, especially compared with a year ago. The underlying concern remains the cost of inputs for 2012. Current crop prices are also worrisome, but there’s still plenty of time to sell 2012 grain. The cost of producing the crop, on the other hand, has escalated and will soon be locked in at much higher levels. Fortunately, lower interest rates and stronger balance sheets are helping to mitigate the cost issue somewhat.

As has been discussed here on numerous occasions, land prices often follow farmers’ expectations for future profitability. Though not as confident as only 12 months ago (after all, farmers are pessimistic by nature), I do not foresee their interest in land abating any in the near future.

In a nutshell, the experts confirmed what many of us have been saying for quite some time – current land values are not a function of speculators manipulating the market in hopes of making a quick profit, or buyers taking on excessive risk by heavily leveraging their purchases (a.k.a. the U.S. housing market).  Instead, values have been driven to their lofty heights by a combination of record net farm income and record low interest rates.  Yes, profits and cash flow have been the catalysts for higher land prices… a stark contrast from the market 30 years ago.

Since the fall of 2006, when the demand for land really began to pick up, one group I think that has been under-appreciated, yet a true stabilizing force in the market, is the ag bankers.  They have kept a close eye on the farm financial situation and provided the necessary capital for farmers/investors to complete land purchases, but only when these borrowers had enough of a down payment so that the risk was minimized.  Hopefully, they’ll continue to keep their lending standards high in the future and act as the brake to slow any reckless behavior.  Now, can you tell me more about that 78 acres that sold in NW Iowa last week for $20,000 per acre?

It will be important to keep a watchful eye on how this affects the 2012 farmland market.  With less profit, farmers will have less money to invest into farmland.  However, this does not necessarily correlate to a decrease in the demand in the farmland market, at least in the short-term (9 – 12 months).  Farmers on average will still have a profitable 2012.  Also, many farmers experienced a very profitable 2011 and are sitting on cash to invest into farmland.  From what we have seen recently (both at our own auctions and observing others), farmer-buyers are not bowing out of the farmland market anytime soon.  $10,000/A  is still the new threshold for Class A Central IL farmland, with some sales pushing north of $11,000/A.  As long as corn and beans remain at level to keep farmers profitable, interest rates stay low, and the availability of farmland remains relatively tight, the aggressiveness of buyers should remain.

I’m the first to admit that there are several different methods for discussing and analyzing the land value issue. Some experts have taken reams of historical data and neatly summarized the whole story in a series of charts and graphs.  Others have taken the more simplified approach of simply talking with land buyers and land sellers to see what’s been motivating their behavior.  When looking at the issue from this angle, it appears the biggest driver in ag land values has been the increase in farm income.  No doubt there are other forces at play, e.g., the risk/return of alternative investments, etc., but it still boils down to the fact that farmers have been making more money and they’ve invested a large part of their profits into new land purchases (or higher rents, thus stabilizing the returns to investors).

The future direction of land values is uncertain (though I personally feel that the rapid increase we’ve seen the past 5 years is going to level off) and I encourage all farmers and investors to continue reading and studying the issue closely.  But when you get to the point when your head is ready to explode from information overload, just remember the basics – if farmers are making money, land values will remain steady and/or move higher.  When they aren’t, especially for an extended period of time, then it’s time to get worried.