Wednesday, December 12, 2012

The cure for high prices is high prices

I just came across another very interesting article written by Dan Piller in the Des Moines Register, titled "Iowa farmland prices hit new record, but boom won't last". The article shows that although farmland prices have soared in the last couple years, farm input costs have risen even faster, commodity prices will eventually come down, and interest rates will also eventually go up. Some combination of these events should lead to a slowdown in the market, or even a slow decline in farmland prices.

The article includes quotes from Mike Duffy of Iowa State University Extension, who recently published an "annual land price survey that showed a 24 percent rise to an average of $8,296 per acre in Iowa" in 2012. Check out the map below for more details - and note that the biggest increases in land prices were all in Northern Iowa, which means similar trends are likely spreading into Southern Minnesota.

Perhaps the most telling quotes in the article are from Bill Davis, chief credit officer with Farm Credit Services of America. Davis "said the increases in farmland values have been driven by three factors: strong domestic and export demand for commodities, historically low interest rates, and strong farm income."

"We believe at least two of these three factors will reverse over the next three to five years,” Davis explains. “The most likely event is a significant reduction in net farm profit levels as we see supplies respond to higher demand levels for commodities. Interest rates also are likely to increase eventually, making alternative investments more attractive than they have been recently.”

Many people remember the farm crisis of the early 80's, but not many believe that it will happen again. As the article states: "Iowa farm values soared in the 1970s in a commodity and land boom similar to today, only to crash spectacularly in the first half of the 1980s. Not until 2010 did Iowa land values return to an inflation-adjusted level of $5,770 per acre."

"Duffy said that because farmers are in better cash positions today than three decades ago, he didn’t think Iowa farmland values were vulnerable to a steep dive. “High land prices kept going higher in the 1970s, even when farm profits narrowed,” Duffy said. “That won’t happen this time.”

If you are interested in selling your farm land at high prices, please contact me. I can perform an appraisal on your land or help you list and sell your property quickly for a fair price. 

Have a great week!

Noah Hultgren