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Farm ground decline wasn’t a shock with over 75 percent foreseeing a drop

January 23, 2017
Iowa State University , Toledo Chronicle, Tama News-Herald

The decline revealed by the 2016 ISU land value survey didn't come as a surprise for some - in November 2015, over 75 percent of 2015 ISU survey respondents thought land values in their territory would continue to decline in 2016. The majority predicted the decline would be either less than 5 percent or between 5 and 10 percent, which is consistent with the 5.9 percent decrease reported by the 2016 ISU survey.

Although modest, the 5.9 percent decline represents a three-year streak where average Iowa farmland values have shown a decline, which is the first time this has happened since the 1980s. For a pessimist, there are plenty of legitimate reasons to worry: according to USDA, net farm income dropped another 17.2 percent to $66.9 billion in August 2016, and this represents the lowest since 2009 in both real and nominal terms.

Financial stress in the agricultural sector shows slow but steady increase, with continued declines in loan repayment rates and uptakes in farm real estate and working capital debt.

Article Photos

-Iowa State University graphic

While corn and soybean prices continue to fall short of production costs, livestock producers faced a tougher environment in 2016 with hog, cattle, and dairy prices all down by at least 30 percent compared to two years ago.

However, this decline is not a doomsday scenario. First, the 5.9 percent decline is still modest and actually lower than the rate many expected to see. Average farmland values hit a historic peak of $8,716 per acre in 2013, but declined 8.9 percent in 2014, 3.9 percent in 2015, and have now fallen an additional 5.9 percent. While they have declined three years in a row now, current Iowa farmland values are still more than double what they were 10 years ago, 64 percent higher than the 2009 values and 7 percent higher than the 2011 values.

From the landowner's perspective, with land values at the county level dropping 2 to 9 percent across Iowa, landowners could still potentially make money with cash rent payments, which typically account for about 2 to 4 percent of land values.

Second, it was widely accepted among farmers and landowners at the start of 2016 that commodity prices, farm income, and profit margin probably wouldn't improve much over the year, and arguably the farmland market has already capitalized these expectations. Therefore, the downward pressures did not cause a panic market reaction. To some extent, this farm downturn, although continuing, is slowing down in its downslide. Over the past few years, the Iowa farmland market first slowed down in the growth rate, from over 20 percent in 2011 and 2012, to merely a 5 percent increase in 2013, and then transitioned to modest losses in 2014 to 2016. In addition, the declines over the last three years are all below 10 percent.

Third, there are still many positive factors bolstering the farmland market, including favorable interest rates, strong balance sheets, and substantial working capital accumulated from the golden 2000s; and, at least for some producers, rising recreational demand and strong conservation payments from programs like CRP.

Put simply, land value is the net present value of all discounted future income flows. With certain assumptions imposed, one could think of land value being net income divided by interest (discount) rate. To understand the changes in land value over time and across space, it is useful to examine how net income and interest rates will change over the next few years. In particular, trends in net income for a particular region will be reflected in the farmland market, which tends to be localized.

 
 

 

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