At last, we’re seeing signs that the bull market for farmland might be taking a breather. Over the past few months, we’ve seen prices in many areas begin to flatten, especially compared to the dramatic rises we’ve seen for three years.
Over a 12-month period, the numbers are still impressive. For example, the Chicago Fed’s Agricultural Newsletter reports these one-year increases in the dollar value of “good” farmland, for the 12-months ending July 1:
- Illinois, +17%
- Indiana, +21%
- Iowa, +18%
- Michigan, +18%
- Wisconsin, +7%
But remember, that’s a 12-month window.
Over a shorter time frame – from April to July of this year – the numbers tell a very different story. For the entire Seventh District, which includes the same five states, the percent change is zero for the shorter time frame. (It’s still up 5% in Indiana for the quarter, but it’s flat everywhere else in the Midwest.)
Let’s focus on Iowa for a moment. Over a three-month period, the Federal Reserve shows a change of – wait for it – zero. That’s right. We go from an 18 to zero, just by looking at a shorter time frame.
We can confirm the shorter term picture by looking at a different data source: the widely followed Realtors Land Institute (RLI) survey of land values. That survey – which covers September 2012 through March 2013 – shows an overall 1.2% increase statewide over the six-month time period.
Looking more closely at the Iowa numbers, we find that prices on high-quality cropland fell by $224 per acre – a decrease of 1.2%. Last September, high-quality cropland stood at $11,661 per acre, and in March, it was $11,437. Medium quality cropland did a little better, but it still fell almost 1%, from $8,780 to $8,694 per acre.
John Kirkpatrick, who heads the Iowa office for Murray Wise Associates and has a close ear to the ground, tells me that he expects more of the same in the near future. Lower corn prices are a big factor in the intermediate term, and there’s a sense among farmers and investors alike that the market was due for a break. A lot of land has been sold at rapidly rising prices over the past three or four years, and everybody knew it couldn’t go on forever.
Rising interest rates are another factor. While farmers as a whole still have relatively low debt, it’s difficult for land prices to rise much further with rising credit costs.
The Chicago Federal Reserve noted that its latest numbers reflect the first time since 2009 that the district hadn’t seen a quarterly increase. Looking ahead, the Fed said survey respondents expect a flat third quarter, with 7% of the bankers surveyed expecting a decrease. (On the flip side, 7% of the bankers also expect prices to increase.)
It’d be nice to think farmland prices will resume their torrid upward march during the last half of 2013, but I don’t expect that to happen. I think we’ll continue to see what we have for the last few months, as the market digests the price increases of recent years along with the rising interest rates and crop prices.
Even when prices were rising at their fastest, most of the land was being bought by farmers, who saw opportunities to acquire land on which they will earn income for decades to come. I won’t say there was no speculation. But most buyers still viewed their purchases as a long-term investment, and turnover relative to the total amount of farmland remains extremely low.
What’s the bottom line?
To me, all of this brings us back to the advice I’ve been giving since I published my first book on farmland investing in 1989: Invest for the long haul. Even with the liquidity provided by today’s auction methods, farmland isn’t suitable for short-term speculation and flipping. If you look at one time period, prices will have risen. If you look at another, they will have been flat or even declined a bit. It’s true in this latest batch of numbers, and it always has been.
If you’re not selling your farm right now, it makes no difference whatsoever. What matters is that your farmland provides a satisfactory return on your investment. Even after all the buying and selling of the past few years, most farmland owners have had their land for years, and they’ve enjoyed handsome returns for a long time. A little blip isn’t going to undo that.