The survey was initiated in 1941 and is spon­sored annually by the Iowa Agriculture and Home Economics Experiment Station, Iowa State University (ISU). 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 the ISU survey results with data from the U.S. Census of Agriculture. The survey was conducted by Michael Duffy.

The survey is intended to provide information on general land value trends, geographical land price relationships, and factors influencing the Iowa land market. The survey is not intended to provide an estimate for any particular piece of property.

The survey is based on reports by licensed real estate brokers and selected individuals considered to be knowledgeable of land market conditions. Respondents were asked to report on more than one county if they were knowledgeable about the land markets. The 2012 survey is based on 486 usable responses, providing 663 county land values estimates. The number of respondents is almost identical to last year’s survey, but the number of county values increased by 3 percent.

Participants in the survey are asked to estimate the value of high, medium, and low grade land in their county. Comparative sales and other factors are taken into account by the respondents in making these value estimates.

Major factors influencing the real estate market

Ninety percent of the survey respondents listed positive and/or negative factors influencing the land market. Of these respondents, almost 100 percent listed at least one positive factor and only 70 percent listed at least one negative factor. The respondents listed multiple factors in most cases.

There were six positive factors listed by over 10 percent of the respondents. The most frequently mentioned positive factor was high commodity prices, mentioned by 80 percent of the respondents. The second most frequently mentioned factor was low interest rates, mentioned by 63 percent of the respondents. Other frequently mentioned positive factors included cash/credit availability (15 percent), good return to land (14 percent), lack of other investments (12 percent), and land availability (10 percent).

There were six negative factors listed by more than 10 percent of the respondents. The most frequently mentioned negative factor on land values was the weather (43 percent). Eighteen percent of the respondents said that values were too high. This was expressed in many ways but, in general, the concern was that land might be on a speculative bubble. Politics was also mentioned by 18 percent of the respondents who listed negative factors. This, too, was expressed in a variety of different ways. High input costs have been identified as a negative factor for a number of years. Input costs were listed by 15 percent of the respondents. Poor yields (14 percent) and overall economic conditions (13 percent) were the final two negative factors on the land market listed.

Number of sales compared to previous year

Over half (56 percent) of the respondents said they had more sales in 2012 relative to 2011. On the other end of the spectrum, just 14 percent reported fewer sales and 29 percent reported the same level of sales in 2012 relative to 2011.

Land sales by buyer category

Respondents were asked what percent of the land was sold to the following four categories of buyers.

• Existing farmers represented 78 percent of the sales.
• Investors represented 18 percent.
• New farmers represented 3 percent.
• Other purchasers represented 1 percent.

Sales to existing farmers by Crop Reporting Districts ranged from 86 percent in Northwest to 63 percent in South Central.
Sales to investors were highest in South Central (31 percent). Northwest and Northeast each reported the lowest investor activity (12 percent).

Interpretation of survey results

The Iowa State University land value survey reported a 23.7 percent increase in Iowa land values. This is the third year in a row where values have increased more than 15 percent. This also marked the eighth time in the past nine years where values increased by double digits per year.

Iowa land values have increased more than two and a half times since 2003. The values have increased an average of 15.1 percent a year for the past decade. Obviously these increases raise concerns there will be a major correction in land values. Almost every day there is an article discussing whether land is in a “speculative bubble.”

The Iowa State survey shows a higher percentage increase relative to other recent surveys. The Chicago Federal Reserve Bank does a survey of lenders in the district. Their most recent survey showed an 18 percent increase in Iowa land values for the period October 2011 to October 2012. The Iowa Chapter of the Realtors Land Institute also surveys their members for Iowa land value estimates. Their most recent survey showed a 7.7 percent increase for the six-month period from March to September.

There are two possible explanations why the Iowa State University survey is higher. First, it was noted by several people that the land values have been increasing more rapidly in the past few months than earlier in the year. Better than expected yields and land sale ac­tivity due to the proposed changes in land related taxes are possible causes for the rapid increase in recent months. A second reason is the different populations being sampled and the difference in wording on the surveys. This could lead to different results, especially in times of uncertainty. Even within the ISU survey there was considerable variation in the estimates.

It is important to remember that the ISU and other surveys are opinion surveys. The surveys simply ask people their opinion of land values. Different people will use different sources of information to form their opinion.

A frequently asked question is how opinion surveys compare to actual sales data. A research project is un­der way at ISU comparing county sales data from the Iowa Land Sales Report and the county values reported in the ISU survey. As expected, the opinion surveys tended to be higher than the actual sales data, by an average of 9 percent. Economic theory suggests the reason for this is because there are two basic values to an asset. There is the value in use and the value in ownership. There are numerous examples where someone paid more for land than its value in use. There could be sentimental value, family ties, or any number of other reasons why land would be valued for more than it could be sold. These factors can be considered in the opinion of the value of land. However, the differences in value between the opinion surveys and the sales study were not statistically different. In some cases, the opinion estimates were higher than the sale data but in others the reverse was true.

One observation from the study was that in 2007, when the land values were first starting to increase at a rapid rate, the opinion data did not reflect these increases. Only about 25 percent of the opinion data was greater than the sales figures. In 2011, however, all of the opinions were higher than the sales data. The prelimi­nary results for 2012 show a return to a more “normal” pattern with opinion above sales but not in all cases.

The ISU land value survey continued to show the predominance of existing farmers in buying the land. In 2012 approximately 78 percent of the land was purchased by an existing farmer. This level of farmer purchases is similar to what existed in the early 1990s. Farmer purchases decreased after that time until they reached a low of 56 percent in 2004. The increase in farmer purchases of farmland corresponds to the increase in returns and corresponding increases in land values.

The majority of the respondents reported more sales in 2012 relative to 2011. The increase in land sales can be attributed to at least two factors. One factor is the increase in value. Many people who may not have been previously motivated to sell their land are doing so now because of the high prices. A second reason for the increase in activity is the uncertainty caused by the possible changes in the estate and capital gains tax rates. Added to this uncertainty is the concern that land values may be at a peak and there will be a dramatic decrease in values forthcoming.

The 2012 land value survey also supports observations that lower quality land is not increasing at the same rate as the higher quality land. Some people have re­ported that lower quality land is not selling, especially if it is priced too high. The survey showed that the lower quality land was not increasing as rapidly as the higher quality land in many areas of the state.

Outlook

Where does this leave us? Many people have discussed the possibility that land is on a speculative bubble and that land values are going to collapse. Will the land market collapse like it did in the early 1980s or similar to the housing market a few years ago? No one knows for sure. But there are several key variables to watch to formulate an opinion.

One of the key variables to watch is income. Theory tells us it would be the net income per acre that is the key, but analysis shows that the total income is a bet­ter predictor. In Iowa there is a 95 percent correlation between land values and the value of agricultural pro­duction in the state. There is an 89 percent correlation between land values and net farm income.

Yield, commodity prices, and costs of production are key components to net farm income. Yield is highly un­certain next year because of the continuing drought. If the drought persists, the lack of surface and subsurface moisture will significantly impact yields.

Crop prices are an important key. In a simplistic view, prices increased dramatically due to increased energy and international demand. Then there was an expected increase in supply due to increased plantings. Coming into 2012 there was a general sentiment that prices would decline from their peaks. But, the drought changed this and the prices remained at high levels. How long the high prices will last is unknown. The world is also responding to higher prices, and there is an expected increase in plantings everywhere. This increased supply will eventually drive prices back down. This is similar to the early 1970s when prices increased dramatically and later declined to a new equilibrium level.

We don’t know what this new equilibrium level of prices will be and, more importantly, we don’t know what level of land values will be supported by the new price levels.

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. The ISU estimated costs of crop production have shown a 61 percent increase in the cost per bushel since 2005.

Without land, the increase has been 87 percent. There are reports of exorbitant rents being paid. This could expose farmers to financial trouble with decreasing prices and/or yields.

Interest rates are another factor determining profitability and land values. Currently, interest rates are at their lowest levels in memory. There is no indication that interest rates will be increasing any time in the near future.

There are other factors to watch when considering whether land is on a speculative bubble. Debt is one indication. Debt levels increased during “bubbles” and, when the asset values began to drop, people were put in a position where they owed more than the asset was worth. This either led to default or to forced sales, which decreased the asset value even more. Currently, debt doesn’t appear to be a problem in the land market.

In the 1970s, many people used a contract for deed to purchase the land. When the land values began to fall, they simply reneged on the contract. This, too, caused the decline in asset values to accelerate. In 2007, less than 4 percent of the land was under contract and the use of contracts since then has been almost non-existent.

A frequently mentioned factor contributing to the high land values is a lack of alternative investments. Many people argue that it is better to put their money into land than into a certificate of deposit with a very low rate of return.

Predicting land value changes is always a difficult task, but it is especially difficult in times such as these. People who lived through the 1970s, the collapse in the 1980s, and the urban real estate collapse of a few years ago know that what goes up can come down. Will Iowa land values be like a bubble bursting as in those times; will there be a more gradual correction to a new plateau in prices; or will there simply be a decrease in the rate of increase, and we won’t experience any major corrections at all?

The 2012 ISU land value survey showed a 23.7 percent increase in land values. Land values have increased 64 percent in just the past three years. But remember that the year before that, 2009, land values dropped 2.2 percent. There is still discipline in the land market. Therefore, it is prudent to be mindful of the factors that influence land values.

2012 Iowa Farmland Value Survey -- Extension web site dedicated to the ISU Land Value Survey, including information from the 2012 news conference and the presentation by Dr. Mike Duffy.

2011 Iowa Farmland Value Survey -- Extension web site dedicated to the ISU Land Value Survey, including information from the 2011 news conference and the presentation by Dr. Mike Duffy.

2010 Iowa Land Value Survey -- Extension web site dedicated to the ISU Land Value Survey, including information from the 2010 news conference and the presentation by Dr. Mike Duffy.

 

Michael D. Duffy, extension economist, 515-294-6160, mduffy@iastate.edu