Although current land values have generally trended lower this past year in comparison to the sharp increases of recent years, results of farm and ranch income at year’s end could shift land market dynamics, according to Farmers National Company, the nation’s leading farm and ranch real estate company.
“Harvest results of 2015 will make it a pivotal year, which could impact the land market for several years,” said Randy Dickhut, AFM, Vice President of Real Estate Operations of Farmers National Company. “Farm and ranch income will drive the direction. A great deal could happen between now and November.”
Dickhut says margin compression is occurring as a result of lower grain prices and steady input costs. He believes higher grain prices this fall would stabilize land values; however, lower prices could push values downward.
While farm and ranch profits are forecast to be lower in 2015 affecting annual cash flows, agriculture overall remains financially strong due to past profits. Operators working to shore up financial stress brought on by overextending cash flow may be looking for strategies to improve their finances. This could lead to a boost in sales as property owners work to right balance sheets, according to Dickhut.
Location and quality of land continue to be the main drivers of pricing for individual tracts. The stability of this market is maintained by a lower supply of land for sale, contrasted with a continued demand for quality properties.
Farmers National Company statistics show the volume of properties for sale is down 40 percent over the past six months, as compared to the past two years. “The current level of available land is having a real impact on farm and ranch operations looking to expand,” said Dickhut. “Demand is still good for quality land. The market just isn’t as aggressive as in the past few years, so values are drifting sideways to lower.”
The market slowdown can, in some ways, be blamed on the absence of tax policy changes, which helped prompt sales this past year to some degree. While land values are down nearly 10 percent in most areas, price softening is happening at different rates in each region. For example, sales in the Northwest have been brisk, as the California drought is driving activity north. The Southern Delta region hasn’t seen much decline, while parts of the Midwest are experiencing significant drops in value.
While current buyers are predominantly active farmers and ranchers adding land to their operations, interest from investment funds and individuals is on the rise. In addition, generational land transfers continue to play a large role in market movements, as many inheriting land choose to sell.
“With the softening of land values, some investors are looking at this as an opportune time to buy,” said Dickhut. “Land is considered a low risk long-term investment, so we will see these types of buyers jumping into the land market more and more over the next several years.”
Demand for cropland and grazing land from owner operators remains good, but buyers are being more realistic in what they will pay given lower grain prices. Land professionals are recommending that sellers be more realistic in evaluating the quality of their land and the expected selling price in order to have a successful sale.
According to Dickhut, long term economic trends look positive in relation to land values and ag markets. Demand for feed grains and protein sources by China and other world markets will remain strong long term as the growing world population has a desire to eat better.
“Demand for our products creates a positive outlook,” said Dickhut. “Any adjustments to values and sales activity are likely to be slow and steady so the impact won’t be overwhelming."