December 4, 2017 Author: Murray Wise
The market for midwestern agricultural land this year has been extremely slow, probably the slowest I’ve seen in 30 years. Based on a relatively small number of transactions, I am seeing higher-quality land maintain its value, while lesser-quality ground has been seeing greater declines.
Part of the reason for the slow market has been the restraint of prospective sellers. They simply don’t know what else to do with capital as returns on treasury bills and bonds have been extremely low, and the stock market seems pricey and risky to many. Also, even though cash rents may be down, owners of farmland continue to see satisfactory returns each year. Most owners I’ve talked with are holding off on selling for the above reasons and thus far have been hesitant to pull the trigger.
Still, I continue to see strong interest in farmland from investors. In a low interest-rate environment, a 3 percent return on Midwestern farmland isn’t something to ignore.
Generally, buyer participation this year has been pretty good, both from farmers and investors. As the quality of land goes down, so does interest in the property. Naturally, when farmers are looking to downsize, they sell off lower-quality tracts first.
My observations have been borne out by others; a mid-year survey by the Illinois Society of Professional Farm Managers and Rural Appraisers found a 1.6 percent drop in value for excellent-quality land in the first half of 2017. Lesser-quality land saw bigger drops, with good-quality land off 3 percent, average-quality land down 3.8 percent and fair-quality land off 4.4 percent.
In August, the Federal Reserve Bank of Chicago’s AgLetter reported that “good” agricultural land values in the five-state district rose 1 percent from the first quarter of 2017 to the second quarter, according to a survey of agricultural bankers, however, year-over-year decreases in overall farmland value were reported in Illinois and Indiana. The Fed AgLetter also reported cash rents in the “I” states are down for the third straight year.
Almost all the downward pressure on farmland values can be attributed to lower grain prices. Many parts of the world, in particular South America and the Midwest US, have had exceptional grain yields the past couple years and it seems we have moved from a demand to a supply market for grain. I expect the next direction in grain prices to be down.
Meanwhile, I’d advise you to keep an eye on some other factors that may affect land values in the coming months namely: Congressional action regarding the estate tax which affects the number of sales caused by transition of farmland between generations and rising interest rates which will not only affect the cost of capital for land purchases but will also affect the relative attractiveness of farmland as an investment asset class. Also watch U.S. trade relations with Mexico and China which have the potential to greatly affect grain markets.
Murray Wise founded the Westchester Group in 1986 after acquiring the Champaign, IL division of the Sandage Companies, a traditional farm management and brokerage firm…
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