FOCUS ON AG

March 21, 2022

LAND VALUES SHARPLY HIGHER INTO 2022

Farm land values in the Upper Midwest have reached or surpassed their highest levels in nearly a decade during the past 12 months, after several years of uncertainty from 2014 to 2020. Depending on what is used for a benchmark, average sales values for high quality farm land in many portions of the Midwest and Northern Plains States are up by 20 to 40 percent in the past year. Lower quality farm land has increased as well, but at a much lower rate. Land values in 2021 increased at the highest year-over-year percentage rate since 2013, which followed the high farm income years from 2011 through 2013.

Many areas of the Upper Midwest, except for North and South Dakota and portions of Western Minnesota, experienced average or above corn and soybean yields in 2021. These solid yields, combined the highest crop prices in several years that existed throughout most of 2021, helped boost final 2021 farm income to much higher levels compared to recent years. The enhanced farm income levels was one of the key factors leading to the sharply higher land values across the Midwest. Land values have also been enhanced by continued relatively low long-term interest rates and very strong buyer interest in 2021 and early 2022. There was also a limited supply of land being offered for sale during the first half of 2021; however, sales volume increased later in the year after land prices began to increase and due to concern over potential changes in tax policy by the Federal government.

Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farm land sales. The average value of Iowa farm land in 2021 was of $9,751 per acre, ranking as the highest average land price ever recorded in the Iowa State survey, which has been conducted annually since 1941. The 2021 land value surpassed the previous high average land value of $8,716 per acre in 2013. Since the recent low point of $7,183 per acre in 2016, the Iowa Farmland Value Survey showed an increase of $2,568 per acre or 35.8 percent in the past five years (2016-2021), including a 29 percent increase in land values in December of 2021, compared to year earlier. (Please refer to the attached table.)

The average 2021 land values increased in all nine crop reporting districts in Iowa, as compared to 2020 average land values. All of the Iowa crop districts had at least a 20 percent increase in land values in 2021, with the greatest increase being 34.8 percent in the North Central district. The Northwest District reported the highest 2021 average land value in Iowa at $12,164 per acre, with the North Central, East and West Central, and Central districts also averaging between $10,000 and $11,000 per acre. The complete results of the 2021 Iowa State land value survey are available at: www.extension.iastate.edu/agdm/wdvalues.html

Trends in agriculture land values in Southern Minnesota are probably fairly close to the trends shown in the Iowa land value survey for northern crop reporting districts in Iowa. Similar to many areas of Iowa, land values were much higher in 2021 in most portions of Southern Minnesota due to the much higher commodity prices and average to above average crop yields in many areas. In recent months, there have been some isolated land sales across Southern Minnesota that have rivaled the highest land values per acre ever recorded. Even with the higher land values, there has continued to be a gap between the average land price for high quality and well drained farm land compared to low quality and poorly drained land.

One of the best sources of farm real estate values in Minnesota is the University of Minnesota’s “Land Economics” web site at: https://landeconomics.umn.edu/. This web site is updated annually in October and accesses a data base of various land values, based on farm land valuations reported to the State Revenue Office by County Assessors Offices throughout the State each year, which are adjusted annually based on actual land sales in a given County. This web site allows for selected sorts by County, State Economic Regions, Watersheds, etc., as well as by types of land.

Data released in late 2021 by the Federal Reserve Districts across the U.S showed similar trends in average land values in the Upper Midwest, compared to a year earlier. The highest 12-month percentage increases at the end of 2021 were Iowa at 28 percent, Minnesota at 26 percent, and South Dakota at 23 percent. Illinois, Indiana, Nebraska, Kansas, and Missouri all recorded year-over-year land value increases between 10 and 16 percent. North Dakota, which was hard-hit by the 2021 drought, recorded only a 4 percent land value increase in 2021.

Recent data from private sources shows that land values have continued to increase during the first three months of 2022. Some areas are showing an increase of 7-10 percent or more in land values since harvest was completed in the Fall of 2021. There have been numerous land sales at $10,000 to $14,000 per acre in Iowa and Southern Minnesota, as well as other portions of the Midwest, with even higher isolated land sale values in portions of Iowa and Illinois. Buyer interest in purchasing land has remained strong by both farm operators and investors.

A recent survey of landowners that was conducted by a private company indicated that over 75 percent of respondents expect farm land prices to increase in 2022, with nearly 40 percent of the respondents expecting an increase of 10 percent or more in the next year. Eighty-seven percent of the respondents in the survey were active farmers. By comparison in similar surveys in 2018 and 2019, only about 10 percent of the respondents expected land values to increase during the following 12 months, while nearly 50 percent of those participating in the survey in those two years expected land values to decline.

Nearly 60 percent of the respondents in the recent survey are interested in buying more farm land in the next year if land becomes available, which compares to approximately 40 percent interested in 2018 and 2019. The value of farm land accounts for over 80 percent of the total farm assets in the U.S. agriculture industry. Most economists point to the relative stability in farm land values in the Midwest as the primary reason that we did not see more farm operations discontinuing due to financial collapse or bankruptcies from 2016-2019.

Currently, most signs point toward continued strength and even potential further modest increases in land values in the next 12 months. However, there are some lingering “caution flags” that could put potentially reverse this optimistic trend and revert to more downward pressure on land values. These potential challenges include:

• Return to lower crop prices and lower profitability in crop and livestock farming.
• The Russian invasion of Ukraine, as well as for other global political unrest.
• Several increases in long-term interest rates by the Federal Reserve Bank in the next year.
• Changes in Federal policies, such as estate taxes, capital gains taxes, or 1031-exchange policies.
• Reduced interest to purchase farm land or a large increase in the amount of land being offered for sale.
• Lack of confidence in the land market by farmers, investors and ag lenders.

The U.S. Federal Reserve recently increased the prime interest rate by .25 percent, up to a revised prime rate of 3.50 percent. This was the first increase in the prime rate in about three years. Many economists are predicting that there could be as many as five to seven more increases in the prime interest rate in the next 12 months. The longer term farm land real estate interest rates, which have already increased by nearly one percent in the past year, are usually more based off of interest rate changes in the bond market for 10-year U.S. Treasury Notes.

The future trend in crop prices, the level of 2022 crop yields, and profitability in livestock production, along with the potential increases in interest rates and possible changes in government policy, will likely determine if there is further strength in land values later this year. Many farm operators and ag lenders in the region have returned to being more optimistic regarding farm land purchases, following the very poor farm profit years from 2016 to 2019. However, some caution is still advised with land purchases at the current higher price levels.

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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960) E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/