Biofuel economy drives land values

By Jennifer Bremer

The biofuel economy is driving the value of land to record prices, with a steady increase expected in years to come.

Iowa State University farm economist Mike Duffy said the average value of an acre of farmland in Iowa increased by just over $700 during the past year, to an all-time high of $3,908.

Land in high demand

Duffy, who conducts the annual survey, said the developing biofuel economy and the high grain prices are driving the land boom.

"The 22 percent increase recorded for 2007 is the greatest one-year increase since 1976, and marks a new record for the fifth year in a row," he said.

Randy Hertz with Hertz Farm Management, Inc. in Nevada, Iowa agreed, "Demand for good quality farmland remains strong across the Midwest and it is obviously driven by higher crop profits."

More than a 100 percent increase has been seen in Iowa land values since the year 2000, when the average value was $1,857.

Duffy is frequently asked if the land market will crash and how high it might go before it tops out, as well as the impact of the dollar, the new farm bill, and the current sub prime mortgage crisis.

"My general feeling is that the land market will remain strong for at least the next five years," he said. "We have seen a fundamental shift in demand for corn due to ethanol production. I don't think this demand will diminish in the near future. If anything could damper land demand, it is cost of production."

Duffy sees high land prices as a two-edged sword. The net worth of landowners statewide increased an average of 22 percent this year, but land rents are also expected to rise as much or more, as a result.

Since farmers often rent half the land they farm, that will affect them as well.

"If you own, it's good news. If you rent, not so good," Duffy said.

Hertz said expansion-minded farmers continue to be strong buyers, especially of land that is adjacent to their own farm ground.

"If two neighbors want the same farm ground and have a higher profit margin, they are generally willing to push land to the limit to get it bought," he said.

The wet spring in some areas may make some growers cautious about purchasing more land since their profits will be smaller; however, high demand and a strong grain market will continue to push values, according to Hertz.

Higher prices

The increase in land values was reported all across Iowa, with the land price averages above $5,000 per acre in four counties and between $4,000 and $5,000 per acre in 51 counties. An increase of more than 25 percent was seen in 19 counties and 59 counties had an increase between 20 and 25 percent.

Smaller percentage increases were seen along both the eastern and western borders of Iowa.

"The areas seeing large and small increases follows with the local demand for corn from ethanol plants," he said. "Counties along the border rivers previously received the best prices for crops due to low transportation costs to gulf port markets. But, now those crops are being used locally by the ethanol plants, which is driving up prices in the interior counties."

Of Iowa's nine crop-reporting districts, northwest Iowa reported the highest average value at $4,699 per acre. The lowest average in the state was in south central Iowa at $2,325 per acre. Northeast Iowa was the leader in percentage increase at 27.2 percent, and east central Iowa had the lowest percentage increase at 14.7 percent.

Hertz noted the 2008 Federal Reserve Band of Chicago's survey showed the value of good agriculture land in the Midwest rose by 14 percent during the first quarter of 2008, noting this as the third largest report by the bank since 1980.

The survey is based on information reported by district agricultural bankers. These bankers expected values to increase during the second quarter of 2008 as well.

Higher rental prices

Since most farmers still rent some land, cash rent prices continue to be on their minds. Iowa State University recently released the 2008 cash rent survey. Cash rent prices statewide range on average from $158 per acre in south central Iowa to $190 per acre in central Iowa with the statewide average being $177 per acre.

This amount is up from the $150 per acre average in 2007 and up $40 per acre from the 2006 mark.

"Strong grain prices have resulted in a rise in rental returns, giving investors stronger annual returns than certificates of deposit and other conservative financial instruments," said Hertz.

Land investments

While grain prices continue to show limit-up rises, Hertz warns that some farmers aren't willing to put money on-the-line for land investments at the present time, since harvest is so far off.

"Some are cautious, especially if they have had a wet spring. The selling price is up, but the expenses are higher too," he said. "Others, however, are purchasing with the thought of a large upside potential."

Investors are doing some of the purchasing. These investors include retired farmers who lived during the depression and think of land ownership as a good asset to have.

Hertz said investors want to participate in the run-up in basic commodities and they view the rise in the purchasing power of the growing middle class in China, India and elsewhere as a powerful mega-trend that will support the demand for raw commodities for a number of years.

"They view farmland as an asset that will benefit from that potential demand," he said. "Plus they are more comfortable investing in farmland than in a bio-fuels plant or by trading commodity futures."

He said investors also look at farmland as a potential "safe haven" if inflation would increase out of control.

Older owners

Duffy conducts a farmland ownership survey every five years. The 2007 survey drew an interesting picture on trends in the state of Iowa.

"In 2007, the survey found that 29 percent of the state's farmland was held by those over 75 years of age and another 27 percent was held by those between 65 and 74," he said. "This means that 56 percent of the state's farmland is owned by people over 65. This percentage is 8 points higher than in 2002."

He said this trend is seen in most of the other Midwestern states as well, which leads to the question of when and how land will change hands in the next decade.

While the survey suggests the potential for a substantial transfer of ownership to occur, it also shows only a small portion of that transfer will involve the outright sale of the property.

The survey also showed an increase in absentee ownership of farmland. "One in five acres is now owned by somebody who does not live in the state. That's up from 6 percent in 1982," said Duffy. "I expect this trend will continue. My guess is we may eventually see this figure rise to one in three acres."

The survey also indicated that 60 percent of Iowa's farmland is owned by someone other than a farmer, leaving 20 percent owned by a full-time farmer and a little under 20 percent owned by a part-time farmer.

"The world of agriculture as we know it here in Iowa has changed," Duffy said. "Where the changes will settle out and when is not known."

Jennifer Bremer can be reached by phone at 515-833-2120 or by e-mail at jbremermaj@hotmail.com.

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Date: 6/27/08

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