Surveys point to continued softening in land values

Land prices continue their reluctant decline in much of the Midwest. While anecdotal and isolated reports of farmland sales remind us that prices are variable by situation and location, the consensus among private lenders and Federal Reserve Banks is continued softening for ag real estate.

“Over the past 12 months, farm prices have fallen by 11 percent, cattle prices are off by 22 percent, and grain prices are down by 20 percent.  Weak agricultural commodity prices are pushing farm income lower and sinking the overall Rural Mainstreet economy,” said Ernie Goss, Jack A. MacAllister Chair in Regional Economics at Creighton University’s Heider College of Business.

Goss reported that in his August 2016 survey, bankers estimated, on average, farmland prices would fall by another 6.9 percent over the next 12 months. However, as in previous months, there is a great deal of variation across the region in the direction and magnitude of farmland prices, with prices growing in some portions of the region.

Bank CEOs reported an average annual cash rent per acre of $252 with almost one-fourth of bankers detailing annual cash rents exceeding $299. Goss surveys bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming.

In late summer, University of Missouri economist Ron Plain released an annual opinion survey for Missouri land prices. Respondents were mostly lenders and rural appraisers. Some of the variability in value direction for land was evident in the responses.

“Respondents reported the value of good cropland was up in 10 of the 20 areas of the state, but the statewide average of $4,677 per acre was down $59 or 1.3 percent below last year,” Plain reported. The survey showed pasture land sliding 3 percent on average with timberland holding steady. Recreational real estate was up $24 per acre on average.

Respondents in the University of Missouri survey commented that low cattle and crop prices had pressured land prices lower, but consistently low-interest rates have slowed the decline. When asked what they expected for the coming 12 months, respondents in the survey predicted cropland values to fall another 3.3 percent and pasture land values to slide by 2.3 percent.

The eastern portion of MFA’s trade territory is included in the Federal Reserve Bank of St. Louis, which performs an agricultural survey each quarter. Its second-quarter survey showed cash rents for ranch and pastureland sliding by 20.7 percent compared to last year, but just 2.2 percent from the first quarter of 2016. Respondents in that survey said second-quarter values for good cropland values remained relatively steady compared to a year-over-year decline of 6.4 percent. Still, the majority of respondents look for continued downward pressure on land prices over the next three months.

At the Kansas City Federal Reserve, assistant vice president Nathan Kauffman said that second quarter survey results were similar in the western side of MFA’s territory.

“Weakening farm income and deteriorating credit conditions continued to pressure farmland values lower. Values of nonirrigated and irrigated cropland declined 3 percent and 5 percent, respectively, from a year ago. Ranchland values also declined 3 percent, continuing the downward trend of recent quarters,” reported Kauffman.

The KC Fed survey showed that similar to other regions, there is variability on land values depending on agricultural uses and geographically specific economic factors.

“Declines in cropland values were most significant in Kansas and Oklahoma, likely due to sustained weakness in profit margins associated with wheat and cattle production and potential spillover effects from difficulties in the energy sector. The declines in Kansas cropland values were, in fact, the largest year-over-year declines in any state [of the Fed’s 10th District] during the downturn of the past two years. Cropland values in Nebraska fell for an eighth consecutive quarter, and the 5 percent decrease in irrigated cropland values for the District was the largest decrease in 29 years,” reported Kauffman.

The KC Fed survey collected similar sentiment from respondents about land prices in the near term. More than 30 percent of banker respondents expect the values of all types of farmland to decline in the next quarter while less than 2 percent expect an increase. And most of them agreed that the overall level of farm wealth is the driving factor.

One thing to watch according to Kauffman: “Bankers also expect farm income to have a more significant effect this year in the adjustment of farmland values than in previous years, suggesting that reductions in cash flow may continue to weigh on farmland values.”