SIOUX FALLS, S.D. (KELO) — Multiple buyers, low interest rates and a short supply of property.
Sounds like a description of the housing market but it’s not.
It’s the expected farm land market in South Dakota, northwest Iowa and southwest Minnesota.
The 2020 farm values reported for each of those three states may not reflect a highly competitive market driving up land prices because, in part, there were factors lowering values, at least in South Dakota and southwest Minnesota.
Extension services in all three states release farm land value reports for 2020. Values declined in South Dakota and southwest Minnesota but increased in Iowa.
“When we were taking our survey for 2020. Things were kind of negative,” said Jack Davis, a crops business management field specialist for the South Dakota State University Extension. “Interest rates were kind of creeping up. And the crop prices really hadn’t risen much. Margins were tight and working capital was (very) tight.”
Iowa State University Extension released its report in December. South Dakota released its July and the University of Minnesota Extension released the southwest Minnesota report in February. All three reports are a snapshot in time. They include sale prices of farm land and may also include survey information from producers. The reports caution farm land owners from making comparisons to their own land.
The average value of a crop farm land in South Dakota was $3,638 an acre in 2020, according to a report from the South Dakota State University Extension.
The average value in 14 counties of southwestern Minnesota was $6,371, according to the University of Minnesota Extension. The region includes Nobles, Rock, Pipestone, Lincoln and 10 other counties.
“There were some that went up last year even though they went down slightly,” said David Bau an extension educator in Minnesota.
The average value of farm land in northwest Iowa was $9,536 per acre. The Iowa value includes all qualities of crop land, according to the Iowa State Extension.
But the factors influencing some lower values described by Davis changed during 2020 and into 2021.
Farmers made more money than expected in 2020 buoyed by increases in crop prices and government programs related to the coronavirus pandemic. And interest rates dropped.
After successive years of losing money on certain crops, farmers made money in 2020, Bau said
The U.S.D.A. projected that farm income would increase by $24.7 billion in 2020 over 2019.
Increases in crop prices also helped drive up income.
For example, Bau said on April 6, the futures price for a bushel of soybeans was $8.08 per bushel in April 2020. As of April 6, 2021, that price was $12.78 per bushel.
A future price is one a farmer can lock in to sell a certain number of bushels of soybeans from his future crop.
“It’s crazy how much of a difference a year made,” Bau said of crop prices.
In Iowa, where an increase in farm land value was reported for 2020, the positive impact of several factors was already noted. The ISUE report said “The recent modest increase in the Iowa farmland market is a result of lower interest rates, substantial government payments, strong demand, and limited land supply.”
Farm land is sold in acre amounts that could range from 60 acres to 160 acres to 500 or more. So, at $3,000 acre for 160 acres, that’s $480,000. If the buyer pays $6,000 an acre, that’s $960,000. If it’s $9,000 an acre, that’s $1.4 million.
When the principal and interest rate are added, a low interest rate on those selling prices makes a difference.
“Just like the housing market, with low interest rates, houses will sell for a higher prices too. That’s really the biggest factor for (farm) land values too,” Davis said.
Who is selling, buying the land?
Realtors may tell of six or 10 offers on a home but farm land value reports don’t indicate such numbers.
Bau and Davis said there is a demand for high quality farm land because there is not a large supply.
“The limited farm land supply helped buoy market prices in many areas across the state,” the ISUE report said.
“It is amount of land that is totally available. If there is no reason to sell it and the rents are holding then people just kind of hang onto it. Then there is not much of a supply of good quality land for those that are interested in expanding,” Davis said.
The supply helped hold land values in 2020 in South Dakota, Davis said. Early in the 2000s land values didn’t drop as much as in the 1980s because there was not the supply for sale of good properties, Davis said.
“A farmer himself usually doesn’t sell until they have (because of ) economics,” Bau said.
Some farm land owners may choose to keep their land because they can receive a good rental price, Davis said. The farm continues to generate an income from the rent.
That land could be owned by a retired farmer or an investor.
Often, the farm land is up for sale when the heirs of a deceased farmer decided to sell it, Bau said.
Davis said a farmer may decide to sell a portion of his land to help with retirement.
“It tends to farmers who buy the majority,” Davis said. “Most of that is bought for the expansion of the farm, or someone getting started, or bringing someone into it.”
“That farm across the road from you comes up for sale tomorrow won’t come for sale in your generation again,” Bau said. “In your lifetime it comes for sale once in a generation. You’re not gonna look back on that and say ‘oh that’s a bad decision to buy ‘ because that’s the only chance (you) had.”
“The majority of farm land sales, 72%, were to existing farmers, of which existing local farmers capture 69% of land sales,” the ISUE report said of all 2020 farm land sales in Iowa. “Only 3% of sales were to existing relocating farmers. Investors represented 22% of land sales. New farmers represented 4% of sales, and other purchasers were 2% of sales.”
How and why do people buy $1 million farm land?
“A lot of land purchases aren’t paid for in cash,” Bau said.
A farmer may be leveraging land they have no debt or low debt on to help pay for the land, Bau said.
Farm land has historically increased in value. There may be drops but Bau said in his area, the value has increased 1 to 2% per year.
Farm land represents a good investment because it holds and increases in value, Davis and Bau said.
Both Bau and Davis said farm land prices should rise in their areas in 2021. Numbers that weren’t available for their 2020 surveys should also show an increase for later in 2020, they said.
“I think the trend right now is probably up. Due the economics of farmers had more income last year, more money on the balance sheet…,” Bau said.
Low margins created by drops in crop prices or increased production cost could be two negative impacts on farm land values, Davis said.
The ISUE report said while 2020 farm land values showed the value was resilient during the pandemic as sales come this year, “…it it is critical to watch for whether the uncertainty posed by the pandemic lead to landowners’ growing interest in selling land, or more stressed sales from financially stressed producers.”