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Buyers and sellers watch land value fluctuations

Buyers and sellers watch land value fluctuations

Land map

Farmland prices have gone up dramatically within the last six months. But families have seen farmland prices increase over generations. This map highlights the sale of Ross Albert’s family’s land in central Illinois in 1991. 

Farmland prices have risen dramatically. That’s not necessarily a bad thing, experts say.

Snow covers fields in Grundy County, Ill.

Snow covers fields in Grundy County, Ill. Farmland prices in the Midwest have soared this year.

According to an ag Realtor, an ag lender, a succession planning expert and a farmer, some farmers are able to sell at a good price and move on. Other farmers are able to buy nearby farmland they have been waiting for.

“The farmland market is doing what the farmland market should be doing,” says Bruce Sherrick, University of Illinois agricultural and consumer economics professor and director of the TIAA-CREF Center for Farmland Research.

Sellers never complain they sold their land for too much. It’s usually the second highest bidder who isn’t happy with the selling price, he said.

In Illinois, average land has appreciated in value by 250% since 2000. Missouri isn’t far behind at 201% and Iowa outpaces all with farmland bought in 2000 appreciating by 330%, according to Sherrick’s research.

Farmland values in Iowa leaped 29% in 2021, to make a new state record, according to Iowa State University’s annual land value survey released Dec. 14. Six of Iowa’s 99 counties saw average farmland prices above $12,000/acre, with the 2021 state average coming in at $9,751, an increase of $2,193 per acre, the university’s year-end report said.

Farmland price appreciation

Land prices are very high now “relative to land history,” but the market is still working, Sherrick said. Older farmers are still expanding, and young farmers are still getting into business, he said in a telephone interview after Christmas.

While institutional investors are a little more active right now, “they don’t overpay,” Sherrick said.

There will be more information about who the buyers are when the next the Illinois Society of Professional Farm Managers and Rural Appraisers annual report comes out in March. Data is being collected now. However, Seth Baker, past president ISPFMRA, says he expects the ratio between institutional buyers and farmers to be about the same.

Baker, of Field Level Agriculture Inc. in Mt. Zion, has seen central Illinois farmland selling at new highs of $15,000 to 16,000 per acre. He notes, “The higher prices make down payments harder, especially for those who don’t have a bit of cash around.”

As for cash rents, Baker sees them going up about $25 per acre. More people are using flexible agreements with a bonus on the back-end, so it’s more equitable to both sides, he said.

Who is buying?

There is strong interest from both farmers and investors right now, said Mike Downey, an associate at Iowa-based Farm Financial Strategies.

Neighboring farmers are willing to pay the current prices

to buy land when a once-in-a-lifetime chance to buy a property near them comes up.

At the same time, with inflation growing, other investors see the merit of land, Downey said.

Potential farmland sellers over the last five years have been primarily estates, but in 2021 there was more interest among active or retiring farmers with the potential of tax laws changing.

“There was a lot of concern about capital gains taxes, but that has settled down a lot,” Downey said.

It is a time when international exports seem favorable, crop prices are high, tax uncertainty existed and interest rates are low. At the same time, the strong crop prices, high profits in 2021 and the ongoing pandemic stress led some farmers to seek an exit, Sherrick said.

Because of agricultural cycles, Downey has seen farmers wait a decade longer to retire than they had planned. The last time prices were so high was 10 years ago. Some are ready to go now.

“Now they want to put something together and go out when prices are strong with historically low interest rates,” he said.

Getting started

There is a lot of attention to what the high prices might mean to beginning farmers, Sherrick said. While land is expensive when starting from scratch, agriculture is not an industry “where you quit your job one day and begin farming the next day,” he said.

“High farmland prices doesn’t mean there will be no access to land for beginning farmers,” Sherrick said.

At 33, Ross Albert, who comes from five generations of farmers but is back to being a first-generation farmer following a gap, is easing into his new career.

The family land he bought back in McLean County, Ill., two years ago is an example of farmland appreciation over the years.

Albert’s great-great-grandfather Henry Wrage bought the land for “little to little more than nothing” in the 1920s. The central Illinois family land was sold in 1991 for $1,572/acre.

In 2020, Albert, his wife Kathleen and a partner — using a beginning farmer loan — were able to buy the almost 200 acres of land between Downs and Leroy, Ill., back for about $9,700 per acre. He estimates that it is likely worth about $15,000/acre now with the surge in land prices in recent months. That’s about a 30% increase.

With a combination of working off farm, pinching pennies and managing his expenses, he has been able to grow his small crop and cattle farm. Today he grows corn, soybeans, hay and operates a small freezer beef business near Heyworth, and is a commercial loan officer and a licensed Illinois real estate broker working for First Mid Bank and Trust in Bloomington.

“For young farmers, a down payment is an extremely high hurdle,” Albert said.

Providing 35% percent or more of a down payment is certainly challenging. However, programs to help young farmers, along with building relationships with farmers and others, may help in the effort, he said. Equity earned in owning other items including 401Ks and IRAS or retirements may also help.

While it is difficult to get started, Albert says it is “doable.”

“Opportunities are created, not earned,” he said.

Some of those opportunities are with less desirable land. With COVID-19, supply chain disruptions, and weather challenges, “even the most ambitious farmers I know are tired,” Albert said. So, they might be ready to let the next guy have a try with that parcel which needs more attention.

He isn’t paying the highest rent, but the landowners like his philosophy for farming.

“My landowners seem to be as interested in my success as I am,” he says.

Beginning farmers must be shrewd at business “and never let the pencil go dull,” he said.

Ross says a young farmer, even one without generational farmland wealth, can accomplish his goals of landownership “if he casts his net wide and deep.”

Exploring options

As a co-owner of Iowa-based Next Gen Ag Advocates, Mike Downey often consults with younger producers wanting to build some equity. He recognizes that even with FSA assistance and beginning farmer loans, a would-be farmer may not come near meeting the lender’s requirements to buy land at current prices.

In some cases, an installment sale with the landowner may be a better option than a bank loan. The seller carries the note and there is more flexibility to get started. The advantage for the seller is the farm couple gets tax advantages and still gets cash flow as well. The buyer can negotiate terms that suit an operation and can start with a lower down payment. In some cases it is as low as 5-10 % where a lender would need 40%, Downey said.

Downey, who grew up on his family’s farm in west-central Illinois, near Roseville, says he is seeing more non-related transition plans in western Illinois these days. He works with both generational and non-related future farmers in Iowa and Illinois.

Also included in any conversation about land values are sustainability issues, Sherrick said. Farmers are now considered part of the solution instead as part of the problem when it comes to carbon sequestration. Farmers may be paid $50/acre to plant cover crops.

These and other sustainability bonuses may be a critical part of farm profits in the long term and may affect land prices, Sherrick said.

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Phyllis Coulter is Northern Illinois field editor, writing for Illinois Farmer Today, Iowa Farmer Today and Missouri Farmer Today.

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