Land prices are booming. But farmers aren't the only ones showing up at
auctions. Flush with cash, investors, developers, recreation lovers and
folks who just want a piece of country life are upping the ante when
land goes on sale.
Don Talley, a farmer and realtor in Plattsburg, Mo., lives in a
developing area north of Kansas City. He is always looking for farms to
buy but concedes that rising land values make purchases difficult to
cash flow.
"Many farms around here are split into 20-acre tracts, and people build
homes on them," says Talley. He has seen land prices in the area
increase about 50% during the past five years.
Talley bought a farm he's developing into 5-acre home sites. He paid
$2,000 per acre on land now worth $6,000 to $7,000 per acre. "There's
good demand for that type of land because we are within commuting
distance of Kansas City," he says. "Many farmers do not consider the
nonfarm value of land, but most who do are people like me who are also
in real estate."
A Valuable Asset
Regardless of who is buying, cropland values are up nationally an
average of 7.2% to $1,780 per acre since 2003 (see map).
Indiana farmers have seen 16 straight years of higher farmland prices.
According to the recent Purdue Land Values Survey, prices averaged
between $2,131 and $3,278 per acre, depending on the land's production
potential.
Craig Dobbins, Purdue University Extension farm management specialist,
cites stronger income expectations, historically low interest rates and
a scarcity of farmland on the market as the primary factors behind the
leap in land values. And he adds that with the low returns on stocks and
other investments, more investors are jumping in and buying property.
"Historically, we see a return of 8 to 9% for Illinois farmland," points
out Gary Schnitkey, a University of Illinois economist. "That's a
reasonable, though lower, return compared with the stock market. But
it's a lot less risky." Many investors have their eyes on transitional
land� �� ��acres shifting out of agricultural production.
"We're seeing a strong demand for rural home sites, subdivisions and
other developments, especially near urban areas," says Dobbins.
"Nonfarmers are increasing the competition for land in locations
desirable for development, and that's moving prices far beyond the
$3,300 for top cropland in Indiana."
He says farmers who sell land at these premium prices are using 1031
tax-free land exchanges to reinvest in other farmland. "Farmers in this
situation are likely to be aggressive bidders," adds Dobbins.
Nonfarm demand is influencing land values everywhere, even in sparsely
populated areas of Wyoming, Colorado, Kansas, Nebraska, Oklahoma and New
Mexico.
Trevin Prieb with The Citizens State Bank in Canton, Kan., has seen land
worth only $440 per acre for agricultural use sell for $1,440 per acre
because of high demand for hunting property.
In Minnesota, farmland values have risen 8 to 10% per year over the past
three years, says Kent Thiesse, vice president at MinnStar Bank at Lake
Crystal. "The majority of land sales are still farmer-to-farmer
transactions, but there's definitely an increasing amount (of land)
being sold to nonfarm entities," he notes.
A recent Illinois survey of farm managers and appraisers shows 44% of
farmland buyers in the state are farmers. Investors made up 39%,
followed by individuals wanting land for recreational uses at 8% and
institutions at 2%.
"These outside investors and buyers are more likely to have other
sources of income to make land payments instead of relying solely on
what's generated off the land," adds Thiesse. "They may be willing and
able to bid up prices. (Looking at it) from a cash-flow standpoint and
(considering) the income you're able to generate off the land, it's
difficult for existing farm operators to justify buying some of this
land at the top end of the market."
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Land Overvalued?
Schnitkey says yes. He notes that many farmers are coming to the
realization that over the long run, today's land values may be
overvalued.
He explains that central Illinois farmland averaged $3,958 per acre from
2000 to 2003, but the capitalized value was only $2,113 per acre, a
difference of $1,845. "We usually start raising the red flag at $2,000,"
he says.
Still, Schnitkey says that falls short of the peak gap of $2,400 per
acre from 1980 to 1984. "Of course, soon after that we experienced the
sharp decline in land prices that brought things back in line," he adds.
Economists and realtors generally agree that a rapid decline in land
values isn't likely to be repeated soon, barring a rapid rise of
interest rates. In addition, income from farm-program payments will
continue to create a strong price floor. (See "Impact of Farm
Programs.")
In this sizzling land market, farmers will have to look hard for
so-called bargains or take a page from their nonfarm competitors.
That's what Larron Copeland of Terrell County, Ga., is doing. He has
been an active but frustrated land buyer.
"A farmer just can't bid on land against these investors," Copeland
says. He declined to bid on a property this past summer when he saw the
price it would sell for to a nonfarm investor.
When calculating a bid, Copeland considers the value of farm-program
payments as well as the nonfarm features of property. "You've got to
figure a way to get your money back if you can't get it from farming,"
he says. "I look at the hunting aspects, and that's not something I did
when I first started buying land."
Copeland bought land several years ago that's now attracting would-be
buyers. "I put a pond on it, cleaned up an old house site and planted
trees around the edges. That increased its value," he says. "Six or
seven years ago, I paid for that land what a doctor or lawyer would have
paid, and I could double my money now if I sold it."
Missouri's Talley also hopes to cash in on development opportunities on
80 acres of pastureland he bought for $2,250 per acre. "You can't pay
those prices by keeping the land for cattle," he says. "But I intend to
run cattle on it until I am able to subdivide it."
Talley sees no indication that farmland values will turn down soon. "As
long as you have government farm programs, land values will keep
increasing. In this area we are harvesting good crops this year, and I
wouldn't be surprised to see land values go up another 10%," he says.
� �� ��With reports from Jim Phillips and Gregg Hillyer