Strong Demand Keeps Farmland Prices High

March 19, 2006

Calvin Leaders and his wife, Dorothy, sold their final piece of Iowa farmland last week: 157 acres just east of Underwood in Pottawattamie County. The winning bid of $3,750 per acre was more than Leaders, 86, ever imagined getting for farmland, and that eased the pain of selling ground that had been in his family since 1949.

"It's kind of hard to let it go, but you can't take it with you," he said.

As spring planting approaches, farm sales are tapering off. Although farm managers and real estate brokers believe year-to-year double-digit percentage increases in farmland prices are becoming a thing of the past, they report a still robust land market.

"I've not seen much weakening" in land prices, said Randy Hertz, vice president of Hertz Farm Management Inc. in Nevada. "People are happy to own land right now."

He and other farm real estate experts use various factors to gauge market trends. Hertz, for instance, looks to the number of farms his company is offering for sale. For more than a year, that figure has held steady, averaging about 55.

"I'd love to have more farms for sale," Hertz said. "When we start getting 100 farms for sale, that means we have more inventory for our buyers to look at. I haven't seen that."

Coupled with limited inventory, strong buyer demand is helping keep prices high, he and others said. Big harvests the past two years, as well as prolonged low interest rates, also have fueled the market.

"I think there's a lot of optimism in agriculture right now, especially with the (growth in) renewable fuels," said Jon Peterson, a West Des Moines-based Realtor for Farmers National Co. in Omaha.

Good farm ground still can yield up to a 4 percent annual net return, he said. While down from recent years, that rate of return is attracting investors.

"I'd still say it's a seller's market," Peterson said.

Nonfarming investors represent a growing percentage of Iowa farmland buyers, but farmers were most of the bidders at the March 6 auction of 80 acres of farmland southwest of Clarinda, said Peterson, who handled the sale.

"There was a lot of local interest," he said.

But outside demand is strong, too, particularly for hilly, wooded land that can be used for recreation and hunting, land market experts said. A 620-acre property in Appanoose County that is listed for $1,500 an acre, for instance, has drawn interest from as far away as Georgia, said Peterson, who represents the sellers. He advertised the land for one week in the Chicago Tribune and in the Atlanta Journal-Constitution, which generated several inquiries from the Atlanta area.

Travis Johnson, a northwest Iowa farm manager and Realtor who also works for Farmers National, said increased ethanol and livestock production in his part of the state have helped support farmland prices.

"That's got buyers pretty optimistic in this area," he said.

On Tuesday, he auctioned 158 acres of farmland located two miles west of Harris, in Osceola County. About 40 people attended the auction. A farmer and an investor were the leading bidders. The farmer bought the property for $3,230 per acre.

Also Tuesday, Hertz's company auctioned 57 acres of farmland located four miles east Northwood, in Worth County. There were three active bidders in the crowd of 35 people, and a farmer had the winning bid of $3,450 per acre, or $3,710 per cropland acre.

"That's a strong sale," Hertz said.

Farmland prices vary widely, depending on the land's quality and location, he and others said.

"As you get close to town, prices get obscene," Hertz said.

A development group paid $46,000 per acre, for instance, for a 54-acre tract on the southwest edge of Ames that Hertz's firm sold for an institutional seller two years ago. Last fall, another developer made an unsolicited bid on farmland located on the northwest edge of Des Moines that a 93-year-old nursing home resident owned.

The land brought about four times its worth as crop ground. The seller hopes to reinvest the proceeds in farmland elsewhere, increasing her land holdings, as well as her annual income, Hertz said.

Results of a semi-annual Iowa farmland value survey, released last Thursday, showed continued strength in the market. Conducted by the Iowa Farm and Land Chapter No. 2 Realtors Land Institute, the survey showed farmland price increases throughout the state. East-central Iowa had the highest average price for the most productive ground - $4,058 per acre. West-central Iowa's average of $3,999 an acre was second-highest, while central Iowa's average of $3,918 per acre was third.

Survey results showed an average statewide increase of 2.4 percent in the price of all types of tillable cropland for the six months ending March 1. Combined with an increase for the six months that ended Sept. 1, that means that prices rose by 7.5 percent in the past year.

In September, the institute said Iowa farmland prices had increased 12 percent for the year ending Sept. 1, compared with a 14.4 percent increase the previous year.

Numerous factors have fueled escalating farmland prices in recent years, including low interest rates, strong crop yields and federal farm program payments. Also contributing to the run-up in land prices is the 1031 exchange - part of the federal tax code that allows investors to make tax-deferred property exchanges. Under the decades-old section of the U.S. Internal Revenue Code, property owners can defer capital gains taxes on the sale of one piece of land or real estate by reinvesting in a "like kind" property. Those who sell urban real estate can reinvest proceeds in rural areas.