Iowa State University recently released the results of their 2011 farmland survey (Farmland Value Reaches Historic Statewide Average) and it does a good job of summarizing of what really took place all across the Corn Belt.  As has been discussed numerous times, the increase in net farm income has been the biggest factor driving land prices higher (for perspective, the average corn price in IA in 2005 was $1.94 per bushel, while the average price in November 2011 was approximately $6.05 per bushel).   When you combine a relatively limited supply of land on the market with a substantial amount of cash available to fuel demand, the results should really not be that surprising.

So what can we expect in 2012?  I am quite confident that we will not see the same percentage increases that we’ve had the past 12 months.  That said, I do think that prices will remain strong for the first half of the year as a carryover from 2011, but it’s the second half of next year that concerns me somewhat.  Grain prices will continue to be the catalyst, but a recent quote I read by economist Jason Henderson – “I have never met a farmer who is unwilling to produce himself [or herself] out of prosperity” – was somewhat of a reality check for me.  Or better stated, one really good crop year could be the brake that stops the seemingly runaway land locomotive. However, if land buyers will remember that farmland is a long-term investment, and plan for both increases and decreases in value over time, then land should remain a good asset to own.

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?

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.

After thoroughly reading the report, I found the most interesting comment to be in the first paragraph:

“For Indiana farmland values, it seems that history may be repeating itself. Just like the early 1970s, strong grain prices, robust net farm incomes, favorable interest rates, competitive farmland demand, and a limited supply of farmland offered to the market provide the environment for a strong increase in farmland values.”

While I can’t argue with the accuracy of this statement, I’m wondering… if it’s possible that we’re repeating the 70’s, is it also possible that we can repeat the 80’s?  Personally, I don’t see an impending crash, but at these times I also think of the famous quote by the philosopher George Santayana – “Those who cannot remember the past are condemned to repeat it”.  Let’s hope that those who experienced the crash first hand 30 years ago learned from it, and those who were too young will listen to those that were there.

Fortunately, the University of Illinois has developed a system (Index Numbers of Illinois Farmland Values) that landowners can use as a guide.  Using USDA information, the formula utilizes a base index number from 1979 (100) and then adds or subtracts from the base each year to reflect whether land prices have gone up or down.  Is this system 100% accurate?  Probably not… the index is an average for the entire state and not for a specific county or township, and it doesn’t factor in what improvements may have been, or are currently, on the parcel. But many attorneys and other professionals find this methodology unbiased and in the absence of any other hard data, they can utilize the system to help determine the value of a property from years ago.

I would suggest using this index cautiously, especially if comparable sale information is available to use.  But if lacking good comps, this formula may be quite helpful in determining historic land valuations.