What happens next to farmland prices?
Randall Hertz Midwest farmland prices have experienced several years of double-digit increases. This past year was no exception with the value of farmland in the Corn Belt rising 13 percent for the year ending October 1, according to a Federal Reserve Bank of Chicago survey. The survey showed an increase of farmland values of 15 percent in Illinois, 11 percent in Indiana, 18 percent in Iowa, and 8 percent in Wisconsin. A Federal Reserve Bank of Kansas City survey reported Nebraska dryland cropland values rose 30.2 percent, and irrigated cropland 23.3 percent, during the same one-year period.
CROPLAND VALUE TRENDS
The semi-annual Iowa Realtors Land Institute survey showed cropland values rose 7.7 percent from March until September. This was in addition to a 10.8 percent increase last September to March. Seven of the nine crop reporting districts list high-quality cropland averaging in excess of $10,000 an acre, with three districts above $11,000 an acre.
Demand for high-quality cropland has been robust. After a slight slowdown in early summer, a rise in demand re-surfaced in late summer, as crop prices reached high levels and producers became more confident about crop yields and crop insurance payments. Survey respondents cited strong commodity prices, favorable long-term interest rates, and limited amounts of land offered for sale as boosting values.
Can this trend continue? Fundamental factors for agricultural production remain strong, with strong farm income of $114 billion forecasted for 2012. Most farmland owners are strong holders/owners of their farmland. Last fall, we saw a flurry of farmland selling and buying.
Farmers and farmland investors are concerned about the federal deficit and quantitative easing/increasing money supply. Farmers and landowners are also concerned Congress will not extend the current tax laws, which would increase income and capital gains taxes in 2013. Currently the top tax rate on long-term capital gains is 15 percent. The 2001 and 2003 tax cuts are scheduled to expire at the end of 2012, and if Congress takes no further action, the capital gains tax rate will go up to 20 percent, effective Jan. 1, 2013. Also, a new tax for 2013 will be the 3.8 percent Medicare surtax, part of the health care reform legislation enacted in 2010. This 3.8 percent is a new tax on passive income above $250,000, including capital gains.
DROUGHT AND CROP INSURANCE
The drought of 2012 sent commodity prices to an all-time high. High commodity prices, along with crop insurance payments in 2012, further strengthened Midwest farmland values through the end of 2012. Looking ahead, there are many factors that could impact commodity prices. U.S farmers are likely to plant 98 million corn acres in 2013, increasing carry over, which could result in lower corn prices. South America has the potential for a record soybean crop in 2013, increasing global supplies. On the other hand, the EPA rejected requests for a waiver of the ethanol mandate, which currently requires almost 14 billion gallons of corn-based ethanol to be blended with the nation’s gasoline supply.
Government uncertainty, high commodity prices and record low interest rates have been fueling a strong farmland market for several years. It’s uncertain how these factors may change in the future and how those changes may impact the value of farmland.