| Updated January, 2009 |  |
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File C2-70 |
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2008 Farmland Value Survey Iowa State University
Michael D. Duffy, extension economist, 515-294-6160, mduffy@iastate.edu, Darnell Smith, research economist, 515-294-8122, darnell@iastate.edu
| Use this decision tool to compare the economic and financial impacts of purchasing a parcel of farmland. |
The survey was initiated in 1941 and is sponsored annually by the Iowa Agriculture and Home Economics Experiment Station, Iowa State University. Only the state average and the district averages are based directly on the ISU survey data. The county estimates are derived by using a procedure that combines the ISU survey results with data from the U.S. Census of Agriculture.
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. Approximately 1,100 surveys are mailed each year. Normally 500-600 completed surveys are returned. The 2008 survey is based on 479 usable responses providing estimates on 625 county land values. Respondents were asked to report on more than one county if they were knowledgeable about the land markets.
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
Survey respondents listed both positive and negative factors influencing the land market. The respondents listed multiple factors in most cases.
There were two positive factors listed by over 10 percent of the respondents. Good grain prices was by far the most frequently mentioned positive factor, being mentioned by 34 percent of the respondents. Low interest rates were mentioned by 14 percent of the respondents.
There were three negative factors listed by more than 10 percent of the respondents. High input costs were listed by 24 percent of the respondents. Declining grain prices were listed by 18 percent of the respondents and the poor general economy was listed by 14 percent of the respondents.
Number of sales compared to previous year
When asked to compare the number of sales in 2008 relative to 2007, 38 percent reported more, 37 percent the same, and 25 percent reported less.
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 69 percent of the sales.
- Investors represented 24 percent.
- New farmers represented 3 percent.
- Other purchasers represented 4 percent.
Sales to existing farmers by Crop Reporting Districts ranged from 83 percent in West Central to 55 percent in South Central and Southwest.
Sales to investors were highest in Southwest (38 percent). West Central reported the lowest investor activity (13 percent).
Interpretation of survey results
It is important to remember the time period when interpreting the 2008 survey results. The Iowa State University survey covers the time period from November 2007 to November 2008. This is important to remember because there have been considerable changes in the situation in Iowa over the past few months. Monthly average corn and soybean prices in Iowa had been continually rising until July of 2008. Corn averaged $5.41 per bushel in July and current prices are below $3. Soybeans averaged $13.10 in July and the current prices are below $8 per bushel. Confounding this change in revenue has been substantial increases in the costs of production, especially for fertilizers and seed.
The lower grain prices and higher costs of production mean lower net revenue per acre which ultimately would imply moderation in land value. As one survey respondent reported; “… the farmland market, after having had a substantial run over the past several years, the uptrend is appearing to be wearing thin. The recent declines in the grain market appear to be having a direct impact on values…”.
A softening of the land market can be inferred by comparing the results of the ISU survey to other surveys of Iowa farmland values. The Realtors Land Institute, which does a semi-annual survey, reported a 6.6 percent increase in values from March to September and an 11 percent increase from September 2007 to March 2008. This would be a 17.6 percent increase from September to September. The 7th District of the Federal Reserve Board reported a 2 percent quarterly increase from July to October and a 17 percent increase in Iowa land values from October to October.
It is important to keep these caveats in mind but, nonetheless, the ISU survey did show considerable strength in Iowa farmland. The $4,468 average value was the sixth straight year of record average land values. Land values have almost doubled since 2003, going from $2,275 to $4,468 in just 5 years.
In 2008, three counties averaged over $6,000 per acre. This is the first time any county has averaged over that amount. Similarly, 2008 marked the first time that no county has averaged below $2,000 per acre.
There were also some notable changes in other categories from the 2008 survey. East Central reported a significant decrease in the amount of sales activities. Almost half, 44 percent, of the respondents from the East Central crop reporting district reported less sales relative to the same time period from a year ago. This is a reflection of the flooding and other hardships suffered in this area over the past year. South Central Iowa also reported a significant decline in sales, 43 percent reported less sales. This perhaps reflects the relatively soft demand for recreational land.
There was a marked increase in the amount of purchases by farmers and a marked decrease in the purchases by the investor category. These trends started a few years ago and reflect the relative strength of the farm economy and farmers tendency to convert profits into farmland. In North Central Iowa investors dropped from 39 to 26 percent of the purchases but purchases in the “Other” category increased from 1 to 12 percent. The ISU survey is an opinion survey so this may reflect different perceptions but it could represent the increase in purchases for energy purposes. In North Central, less than one-fourth of the respondents to this year’s survey were new.
Iowa farmland is not immune from the current financial situation in the United States and around the world. Exports still make up a sizeable portion of the demand for our grain. In addition, international competition for inputs is strong and having a significant impact on prices. How the current financial situation will play out and over what time period still remains unclear. Regardless there will be impacts on Iowa farmland values.
It is fortunate that today a considerable amount of Iowa’s farmland is held without debt. A recently released survey on Iowa farmland ownership showed that 75 percent of the land was debt free. Debt has been used for recent sales but an estimated fourth of the purchases were essentially without debt.
Another factor further clouding the future with respect to Iowa farmland values is the aging farmland owner. Recent estimates show that over half, 55 percent, of the farmland is owned by people over the age of 65. Approximately 10 percent of the farmland, 1 in 10 acres, is owned by a single female over the age of 75. This means there will be a considerable amount of farmland changing ownership over the next several years. Although most people indicated the higher land values had not changed their plans it remains to be seen if the same will be true in the new environment.
So what does all this mean for Iowa farmland values? To be sure the future is very uncertain. We have seen events over the past few months that are unprecedented and make predictions extremely tenuous. In last year’s land value survey report I expected land values to remain strong for at least the next five years. I based this on the mistaken believe that the ethanol boom and subsequent demand for grains was going to last at least that long. Little did I imagine that we would see an almost 50 percent drop in grain prices in just 6 months. I also didn’t consider that costs of production would rise as fast as they have. In addition, I never considered that we would see diesel prices fall by almost a fourth since last year and over a third since their high in July of this year. Finally, it never occurred to me in my wildest imagination, that we would see a financial bailout of the magnitude that we have seen. Today we have government oversight of financial institutions and the very real possibility of direct government participation in the big three automakers.
I mention these factors not as an excuse for poor forecasting last year but as way of indicating the uncertainty of the future, even six months from now. A recent article in the Cleveland Federal Reserve Board report commented that “Economists, even in groups, are not very precise forecasters…” when faced with situations like we have today.
In spite of this uncertainty I will still forge ahead. My feeling is that we have reached a plateau in land values for the near term. A good deal of uncertainty exists long term due to the chaotic global financial situation. There will be adjustments but I don’t expect to see a major drop in values reminiscent of the early 1980s because so much of our land is held without debt and the use of contracts as a debt instrument is significantly lower than it was during the late 1970s. This means we should not see the forced liquidations or contract abandonment that we witnessed in the 1980s. There will be financial troubles for farmers, however, especially for those who took on debt for machinery, equipment or other reasons. Their ability to maintain payments and avoid liquidations will be critical.
Someone selling land today may not be able to get the same amount as they could have a few months ago. Many of the survey respondents indicated that this was the case. Some said there were still locales with stronger prices but for the most part it was steady to weaker.
Does this mean values have fallen or simply quit rising? My preference is to view this as a return to more normal conditions in the land market where the unbridled exuberance we witnessed the past 24 months has been curtailed. I think the land values will retreat some from the highs but not go into the free-fall we witnessed in the 1980s. Unbridled pessimism can have the reverse effect from what we have recently witnessed. One thing we should have learned is that anything can happen and probably will. Where land values will go in the next year or so is really anyone’s guess but, overall, Iowa farmland should remain a good investment for the long run.
2008 Iowa Land Value Survey -- Extension web site dedicated to the ISU Land Value Survey, including information from the 2007 news conference and the presentation by Dr. Mike Duffy.