No one knows the future, but there is a good possibility that we have seen the
last of the rising land value reports for a while.
By Andrew Swenson, Farm and Family Resource Management Specialist
NDSU Agribusiness and Applied Economics Department
However, it has been a historic run that culminated with an exclamation mark. On
Aug. 2, the U.S. Department of Agriculture reported results from a June survey
showing average North Dakota cropland values at $1,910 per acre, which was a
41.5 percent increase from the previous year. At 30.2 percent, South Dakota had
the next highest increase. The national average was 13 percent.
The survey confirms the 42 percent increase from an earlier survey commissioned
by the North Dakota Department of Land Trusts and the 46 percent increase
reported by the North Dakota Chapter of the American Society of Farm Managers
and Rural Appraisers.
In 2003, North Dakota cropland was less than one-fourth, $460 per acre, compared
with its current value. During the past 10 years, it has averaged an annual
increase of nearly 16 percent. During the past 100 years, the closest
comparisons to this multiyear increase in values were 1973 through 1981 and 1942
through 1949. The values can be adjusted for inflation to compare the periods.
North Dakota cropland is now more than 20 percent greater than the previous
highest inflation-adjusted land values, which occurred in 1979.
Consider the combination of circumstances that have fueled the strong land
market and whether increases will continue. There have been several years of
strong crop profits coupled with low interest rates. It is unusual that these
conditions have been maintained for such an extended period because economic
markets are constantly changing and adjusting. High prices should encourage
greater production and lower the quantity demanded. The old saying is: “High
prices cure high prices.”
Grain prices have been at higher levels since 2007. For example, from 2007
through 2012, the North Dakota marketing year price for spring wheat averaged
$7.17 per bushel. In comparison, the next highest six-year period was 1992
through 1997, when it averaged $3.77 per bushel. The 2012 marketing year price
was a record at $8.65 per bushel.
Higher grain prices have coincided with the increase of U.S. corn use for
ethanol from 1.2 billion bushels in 2004 to more than 5 billion bushels in 2010,
which was about 40 percent of the crop. That demand for corn has plateaued and
will not increase.
Another price driver has been exports of U.S. soybeans to China. Exports
increased from 160 million bushels in 2001 to just less than 900 million bushels
in 2010. Further increases will depend on China’s economic growth and
Producers here and around the world have been striving to produce more to
capitalize on high prices. In North Dakota, the acreage in the conservation
reserve program (CRP) has been reduced by more than 1.5 million acres since
2007. In some areas of the state, there are several instances where pasture land
has been converted to cropland. Also, the state’s producers have been willing to
double total expenditures per acre, compared with 2004, because of higher input
prices and a desire to increase yields.
However, unlike the production of most other goods, weather is a wild card that
can greatly alter agricultural output. Globally, weather circumstances have
thwarted some of the efforts farmers have made to increase production. Examples
are droughts in the Black Sea region in 2010 and in the U.S. Corn Belt last
year. This has kept grain supplies tight and prices strong.
Fortunately, for the most part, North Dakota yields have been strong in recent
years. For example, the four years spanning 2009 through 2012 provided the three
highest wheat yields in history. Strong yields and prices equal great revenue
and provide producers the attitude and financial means to bid more for land.
Mike Duffy, Iowa State University agriculture economist, wrote that there is a
95 percent correlation between the value of agricultural production and land
values in Iowa.
North Dakota crop producers had historic returns in 2012. The average profit per
acre on cash- rented land, according to Farm Business Management Education
reports, was more than $100 per acre for spring wheat, more than $200 per acre
for soybeans and about $350 per acre for corn.
Gross and net returns for 2013 will be much less because of a combination of
lower prices and yields. I estimate that average net returns will range from
minus $50 to a positive $70 per acre for wheat, corn and soybeans. Although
solid crop insurance protection limits the downside, 2013 profit will fall short
of the expectations that were built during the 2007 through 2012 period. It will
have a cooling impact on land values.
Going forward, a drop in crop prices will lessen crop insurance revenue
guarantees, which, during the years of high prices, have given producers a
strong financial backstop that contributed to increased land rents and values.
Another factor that has been important in driving land values has been low
interest rates. It is indicative of the relatively poor returns of other assets
in which people can invest. Ten years ago, an acceptable return on land
investment (cash rent minus real estate taxes divided by land value) was more
than 6 percent. Now it is about 3 percent. That alone has doubled land values.
To achieve a return of just one percentage point more, to 4 percent, land values
would need to drop by one-fourth while other factors held constant.
Most economists believe interest rates have bottomed out. The interest rate on
10-year U.S. Treasury bills declined from more than 5 percent in mid-2007 to
around 1.5 percent in mid-2012. Rates have increased from 1.66 percent on May 1,
2013, to 2.87 percent on Aug. 21, 2013.
The outlook for federal support of agriculture is a negative for land values.
Subsidies for agriculture are expected to diminish after a new farm bill is
legislated. For example, direct payments average about $10 per cropland acre in
North Dakota. If direct payments are eliminated, the eventual impact on average
land values could be a reduction of about $300 per acre, assuming the current 3
percent expected return on land.
Lastly, although net farm income and owner’s equity have flourished, total debt
has increased. Much of the available cash has been ploughed back in the farm
business by purchases of machinery, shops, grain storage and prepaid expenses,
often in response to strong tax incentives.
In 2012, the average farm enrolled in the North Dakota farm business management
education program spent $190,000 on equipment and buildings, compared with
$44,000 in 2006. Therefore, although substantial crop inventories and deferred
grain sales turned into cash this year, there may be less eagerness to bid land
values higher, assuming future profit prospects are dimmer, compared with the
series of strong profit years of 2007 through 2012.
In summary, the extraordinary increase in farmland values is likely over.