For the first time in more than 30 years, prices paid for farmland in the region have gained more than 20 percent two years in a row, according to a new survey of bankers.
But those rapid gains may slow down in 2012 if farm income levels off this year as expected.
In the seven-state survey by the Federal Reserve Bank of Kansas City, Nebraska farmland prices led the way with increases of 41.4 percent for irrigated cropland, 38.6 percent for non-irrigated cropland and 26.1 percent for ranchland. For the region, the increases averaged 30 percent for irrigated cropland, 25 percent for non-irrigated cropland and 16 percent for ranchland.
“Wow!” said Purdue University agriculture economist Brent Gloy. “Huge, huge jumps. ... There’s a lot of demand for farmland, and a pretty darned limited supply.”
The gains are fueled by healthy profits from grain and livestock, boosting demand from buyers. At the same time, few people are selling farmland, the economists said, partly because of those profits and partly because landowners are unsure where they would invest money from a land sale.
The survey of 235 commercial banks in the Federal Reserve’s 10th District compares farmland prices paid in the first quarter of 2012 with prices paid a year earlier. Last year, the survey reported an average 20 percent increase, including 24 percent for cropland in Nebraska. The survey also covers Missouri, Kansas, Oklahoma, Wyoming, Colorado and New Mexico.
Although Iowa was not included in the latest survey, a similar recent study said farmland prices in Iowa rose 27 percent over the past year.
“What we’re hearing from bankers and from land brokers is that the primary buyer is going to be the farmer,” said Jason Henderson, who headed the farm survey. He is the executive in charge of the Kansas City bank’s Omaha branch. “The highest auction prices tend to be emerging when you have two competing neighbors bidding.”
Henderson said Nebraska’s price increases are the highest in the region partly because farm income has been better than in the other states, where drought has cut crop yields.
Bankers in the survey said some nonfarm investors are buying land, but their impact on prices is small. Many of the sellers are people who inherited their family farms but are no longer actively involved in farming, Henderson said. They see today’s land prices as a chance to turn the land into cash.
He said he expects farm income to level off this year because crop yields are expected to be high and prices soft. That may slow the increase in prices paid for farmland, he said, but few of the bankers in the survey expect farmland prices to actually drop.
Bruce Johnson, a University of Nebraska-Lincoln farm economist, said in a recent study that farmland values may remain high, but it’s more likely that factors such as weather, the value of the U.S. dollar, interest rates or political unrest abroad could cause prices to drop.
“Call it a reality reset,” Johnson wrote, noting that high-quality irrigated cropland in Nebraska has sold for record prices topping $10,000 an acre. His recent survey indicated overall land prices average $2,410 an acre, up 31 percent from a year earlier — the largest percentage gain in the 34 years that the university has been tracking the prices.
Gloy, the Purdue economist, said land prices might be subject to a “price shock” if farm income drops. But farmers, for the most part, have not borrowed heavily in recent years, with many of them paying cash.
“It would be worrisome if they were buying this with a lot of leverage going into it,” he said. Low debt means farmers can avoid a financial crunch if interest rates rise sharply. But if farm income drops this year, some farmers might borrow money on their land to pay for planting and harvesting their 2013 crops.
“I would sure think that those increases would start to moderate, in part just because the crop prices are not going to be nearly as good this year,” Gloy said. “That may take a little bit of the wind out of people’s sails in terms of what they think their future income might be from these farms. Even if you buy it with cash, that doesn’t mean that you’re completely insulated from the value going down.”
Of the states in the survey, Nebraska farmers also carried over the lowest levels of debt into 2012, Henderson’s survey indicated. Demand for farm loans is the lowest since the 1980s, the banks in the survey said, but farm spending on household goods and improvements is up, thanks to high farm income. Farm credit conditions strengthened, with more loans being repaid.
Nearly 40 percent of the bankers said they had more money available to lend to qualified borrowers. Farm loan demand is weak, they said, sending interest rates down to an average of 6.2 percent for operating loans and 5.8 percent for real estate loans.
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