Landowner Know-How

ILLINOIS

Overall land values in Illinois have jumped an amazing 45% since 2003.

Dale Aupperle says what's pushing land values here is pure and simple—higher commodity prices.

"We have $4 corn and $8 beans," he says. "There's a belief that because of ethanol the demand for corn is both solid and long-term. People are convinced ethanol has a stable future and that demand will be there for the next three to five years."

Aupperle owns Heartland Ag Group, a professional farm management and real estate company serving the central Midwest. He says Macon County is a good example of an area where prices started to hit $6,000 an acre after corn went to $4 a bushel.

Land transactions are largely cash deals now, with a minimal amount of borrowed money going into the purchase of rural property. A lot of investment cash is also coming into agriculture now.

Aupperle points out that nonfarmers own 72% of the land in Macon County. By comparison, the U.S. average is 55%.

Recreational land continues to be popular, with prices ranging from $2,000 to $4,000 an acre. "That price is competitive with farmland in some areas," says Aupperle. "It's amazing. It just shows that people still want these smaller tracts of land—say 40 to 80 acres."

Pike County is a popular place for recreational land sales, and Aupperle comments that "there are more people with money wanting recreational tracts in Illinois than there is land available."

Better profit margins for crop producers are fueling a drive to buy land among Indiana's farmers.

Ethanol and soy diesel are strong reasons for the land value surge, says Purdue Extension economist Craig Dobbins. Expectations are that the state will add five more plants next year. The state has five currently functioning.

One thing tempering enthusiasm in the land market this year was drought. It was a dose of caution everyone across the Midwest didn't get.

"The east side of the state was extremely dry, and we're seeing a difference in land values based to some degree on that. It's simply made people more cautious," Dobbins says.

Top quality land, with a production average of 175 bushels of corn to the acre, is selling for an average price of around $4,407 an acre. Land with lower production capability—say 144 bushels—tends to be valued around $3,688 per acre.

Recreational land values are even with that of average farmland, with location being a big factor.

"Properties reasonably close to major metropolitan areas will obviously draw a higher price. People want to get away, but not too far. And if the area has good timber and hunting, it adds to the value."

Expect continued upward movement in land prices in 2008, but Dobbins cautions it will be difficult to duplicate 2007 increases.

It's not unheard of to pay $5,000 per acre for a top piece of farmland in Iowa this year, says Mike Wentzel, a broker with Farmers National Company Real Estate.

Average prices for farmland in Palo Alto County—in the heart of northwest Iowa—are usually in the $4,000 to $4,200 range. But Wentzel has seen $5,000 and expects to see it again.

The last five farms he's sold were to farmers, reversing a trend. Farmers had been out of the rural land market, he says, but high commodity prices are spurring many to add land. They are often doing so with cash in hand. When financing is part of the deal, banks are asking for 40 to 50% down.

"I think banks are mindful about what happened in the 1980s," says Wentzel. "Because of that they are asking for these bigger down payments. Think about it: If half the price of that acre is already paid for, even if land prices drop by half you're protected."

There is good demand for recreational land here because pheasant hunting is a big draw. Prices for this type acreage can hit $2,500 an acre.

One trend Wentzel reports is a surge in land auctions.

"We're seeing a lot of farmland auctions where family members have inherited land but never farmed it. They're hearing land prices are good. That, along with uncertainty about future capital gains tax rates, is spurring a lot of them to sell."

Next year land prices will continue to be tightly tied to corn and bean prices, but gains in land value may be more modest.

The demand for land has increased in all areas—residential, commercial, recreational, industrial and agricultural. Atlanta's ever-growing reach is the engine that's keeping land values here so hot.

Population growth and urbanization are really driving up land prices in the state. Sidney Law, a county agent in rural Washington County, says land prices in his area took off in 2000 and just skyrocketed in 2004.

Foreign investment money and 1031s were driving prices up, with people buying land sight-unseen, he says.

"Last year things slowed down. I'd even say land prices dropped back a little. But it's not uncommon today to see land for $2,500 or $3,000 an acre," says Law. "That's farmland or timberland. If it's got a good timber value it can go above that. Good road frontage helps too."

In his area Law says few farmers can afford to add to their land holdings right now. But with plans for a cellulosic ethanol plant on the horizon, he thinks prices are headed up again in 2008.

OHIO

Higher crop prices and an influx of 1031 tax-deferred exchange money are major factors in Ohio's strong land prices this year.

Buyers in Darke County are paying $4,000 to $6,000 for an acre of farmland right now, says Barry Ward, ag economist with Ohio State University. And unlike many states in the Midwest, ethanol is not a big factor here yet.

"We hear there will be four to five plants put in next year—ultimately as many as eight or 12. But right now none of our corn is going into the ethanol pipeline," says Ward.

Instead he's seeing people spooked out of the stock market looking for a place to park their money. Development is also strong in Ohio this year, and people continue to move out of metropolitan areas—explaining the importance of 1031 money.

More farmers are buying farmland than was the custom a couple of years ago. For 2007, Ward says the increase in farmland prices will likely be about 4.5%.

Recreational land in the Appalachian areas is a strong draw, bringing from $2,000 to $3,000 an acre. A timber component can drive the price higher.

Texas is a tough state to get your head around because land types and values can vary wildly.

One man who tries to track it all is Charles Gilliland, research economist with the Texas Real Estate Center at Texas A&M University.

Gilliland describes the last several years in Texas real estate as "almost frenzied." He says it became nearly impossible to price land too high. Eventually resistance to prices began to be met, and that led to a bit of a slowdown in 2007.

"Properties are still selling; it's just that this frenzied sales activity has become more manageable," he says.

Foreign investment is a factor to watch, Gilliland says. In 2005, foreign investors owned 29,000 acres of Texas timberland. By 2006, that number was at nearly 430,000 acres.

Recreational land dominates much of the market. Gilliland says one of the premier recreational areas in the state is around Kerrville, and the median price there is $7,800 an acre.

Cropland sales have been less active over the past few years. Prices around Lubbock have been topping out at $600 an acre for several years now; that's nonirrigated ground.

"There are some areas in the western part of the Panhandle that have been the target of dairy farms. Those producers came in a couple of years ago and paid premiums for farms up there to get started. Then they started buying land around them to raise feed."

Looking at land areas where investment is most likely to pay off, Gilliland says the closer you are to an urban area the higher the land value will be. For Texas, close is relative. Gilliland says he sees a positive price effect as much as four hours outside a city.

As land values shift, so have the priorities of Alabama buyers.

Dave Milton, head of AlaLandCo, a land and farm brokerage outfit in the state, says timberland is now less about the timber and more about the land's aesthetic value.

"Fifteen years ago when you looked at a timber tract in the eastern part of the state, about 75% of the value was determined by the commodity; and about 25% by intrinsic values, aesthetics and things that had nothing to do with the sale of the timber. Today those two numbers are inverted."

Buyers are looking for views, creeks, ponds and other recreational opportunities. This has led to big upswings in prices for mountain property.

There continues to be a lot of 1031 tax-deferred exchange money coming into Alabama. Central and southern Florida landowners who sell property and move up into Alabama are a big part of the reason. Expansion out of the Atlanta area is also creating a drive for land.

Milton says the eastern side of the state is appreciating most rapidly. On the western side where the agricultural Black Belt lies, economic development has been slower.

Sales of farmland can bring $4,000 an acre, but this is often for farmland that will be converted to something else. "I sold an old cattle farm in Macon County recently, which is representative," Milton says. "It was 113 acres of nice pasture bought for a recreational horse farm. They paid $4,000 an acre."

A 100-year drought in the state has been a weight on values this year. In theory prices should be higher, but it hasn't happened.

Don't let the USDA's average cropland value of $6,000 an acre fool you. That isn't what real rural land here costs.

Stephen Bolt, a rural land and agricultural property appraiser with AgChoice Farm Credit out of Towanda, says while he's seeing higher land values, the overall increase is more like 12%. "If you take 100 acres of very rural land that sold last year and compare it to this year, you'll see about a 5 to 7% increase. Those are areas absolutely unaffected by urban influences."

Conservation programs are having a significant effect on the availability of land for rent or purchase by farmers. Bolt says these programs offer good income streams, and when land becomes available the programs help farmers pay a little more for it. "Farmers today are concerned that if they don't buy land close to their operations when it comes available they will lose it and never have the chance again. That's pushing them to buy," says Bolt.

With recreational land, timber is a consideration in the overall value. There is a lot of speculation in the timber market here, with people buying land to cut the timber and resell it for recreational use.

After the valuable timber is gone, land that might have originally sold for $4,000 will bring $900 or $1,000 an acre. A slump in the timber industry is slowing this trend.

Virginia is one of those states where you have to tease apart the numbers to get at true rural land values.

Gordon Groover, farm management Extension economist at Virginia Tech Cooperative Extension, says "full-time farmers are few and far between here."

Some 1031 tax-deferred exchanges are being used as out-of-state dairy producers move from urban areas of the Northeast. But most land in agricultural production is on a long-term lease and is being held for its value as land—but not necessarily as agricultural land.

"There are areas in the Blue Ridge Mountains where Christmas tree production is a viable entity, and producers are buying land for this use," says Groover.

"There is also a good bit of value-added production closer to metropolitan areas. Farmers are producing pasture-finished beef, greenhouse plants, turf, landscape plants—anything they can sell directly to the consumer."

The value of land here is so diverse you literally have to put your finger on a map and ask "what land is worth here" to get an idea, says Groover. "We hear of land going for $10,000 an acre, and then we hear of it selling for $2,000 to $3,000 an acre. It all depends on location and who's buying."

For 2008 Groover expects land prices will continue to climb. "From the standpoint of farming, though, whether you're talking $6,800 an acre or $7,900 an acre, a farming enterprise won't pay for that.

"Land values here are a blessing and a curse. People may have a farm that's paid for, which is a great hedge against inflation and looks good on the asset side of the balance sheet. But in the real world this land can't generate enough to sustain a profitable business at today's prices."

Behind the Numbers

Lead-in numbers for average value, percent increase and average cash rent are from the USDA's 2007 "Land Values and Cash Rents." This data is often different from on-the-ground reports. Taken together you'll get a fuller picture of today's rural land market.