Farmland values continue to defy gravity in many regions of farm country. Reports from the Federal Reserve Banks, universities and real estate groups continue to point to stable or slightly softer prices.
“Farmland prices remain resilient despite downward pressures,” says R.D. Schrader, president of Schrader Real Estate and Auction Company in Columbia City, Ind.
Yet, most farmland analysts expect farmland values to continue to drift lower. This is due to a multitude of factors, Schrader notes, such as reduced incomes for farmers, higher interest rates, a strong dollar and trade uncertainty.
Here are three reasons farmland values could make a dramatic move.
1. Supply of Farmland for Sale
Overall, limited farmland sale inventories are supporting the broad market across the Midwest, according to Doug Hensley, president of real estate services for Hertz Farm Management in Nevada, Iowa.
“Few farms are being offered to the market, and those sales are still finding buyers,” he says. “In early 2019, the Midwestern land market has continued to reflect somewhat surprising resilience and overall stability.”
Most farms only come up for sale once in three or four generations, adds Randy Dickhut, senior vice president of real estate operations for Farmers National Company in Omaha, Neb. This keeps demand for high-quality farmland up.
Yet, lower quality farm prices have softened more over this period due to being less efficient to farm, Dickhut says.
2. Sales Due to Farmers’ Financial Stress
One of the biggest wild cards for farmland values that Dickhut is watching is how many land sales will occur due to financial stress among farmers.
“Till now, we have not seen that many stressed sales in the open market,” he says. “Many of these sales happen quietly behind the scenes between a farmer seller and an investor buyer before the lender forces a sale of assets in the marketplace.”
But, now is the time when the refinancing season ends, and the first cash rent payments are due.
“Most expect to see a few more land sales over the coming months from financially stressed operations,” he says. “The question becomes how many more sales in an area will it take to put downward pressure on land prices? At this time, buying interest in most areas has been adequate enough to purchase the good land that comes up for sale.”
3. The Portfolio of Buyers
The vast majority of farmland buyers continue to be farmers. For instance, in Iowa, 77% of farmland is bought by farmers, 18% by investors and 5% by other buyers, according to the twice-yearly survey conducted by the Iowa Chapter of the Realtors Land Institute.
“Investors remain very competitive, but farmers continue to buy most of the farms at auction,” adds Jim Rothermich, an Iowa real estate appraiser who diligently tracks all farmland sales in the Hawkeye State.
Yet, there’s an increasing trend happening with investor buyers, Rothermich says.
“According to the realtors I visit with, there is an uptick in the number of farmers wanting to do ‘sale lease backs,’” he says. “This is an excellent option for a farmer who is needing to restructure debt and still have control over those acres. Farmers doing ‘sale lease backs’ are being proactive with their financial situation and are privately negotiating the sale price. These farms do not get exposure to the market.”
What’s Ahead for Farmland Values?
“Putting all the what ifs together, including trade issues, weather, global commodity demand and interest rate direction, along with the expectation for continued farm financial stress, it becomes reasonable to expect land values to take another small tick downward as buyers continue to be cautious in making purchase decisions,” Dickhut says. “On the other hand, if several of the uncertainties are resolved favorably and the supply of good farmland for sale remains low, there will be support for current land prices.”
Schrader agrees. “Given current and short-term projected farm incomes, I would expect farmland values to continue to drift slightly lower,” he says. “Of course, new variables, such as a good trade agreement with China, could be positive. The biggest factor will be supply and demand.”