Midwest farm prices soar thanks to strong demand

DES MOINES, Iowa – Increased commodity prices and strong demand have sent prices of farmland skyrocketing in the Midwest, making it more difficult for young and beginning farmers to get established but strengthening the balance sheets for those who own the land.

Across the Corn Belt, the price of farmland was on the rise in 2010. The highest increases were seen in Iowa, where values rose 13 percent and an acre of farmland sold for upward of $7,000 in some areas of the state. Minnesota and Wisconsin also saw double-digit increases in farmland value, averaging 12 percent and 11 percent respectively, according to the Federal Reserve Bank in Kansas City.

“A lot of it is driven by commodity prices,” said Jason Henderson, a branch manager and economist with the Federal Reserve Bank in Omaha, Neb. “As soon as June, the Russian drought started to raise concerns about global crop supplies and we saw commodity prices begin to rise and we saw farmland values rise with commodity prices.”

Nebraska, Kansas and Missouri all saw average farmland values increase about 9.5 percent in 2010. Illinois, Indiana, North Dakota and South Dakota also saw average increases ranging from 8 percent to 11 percent.

Besides increased commodity prices – for crops such as corn and soybeans – there has been an increased demand for farmland, which is increasingly seen as a stable investment.

“We’re starting to see more interest in farmland purchases by nonfarm investors,” Henderson said. “It’s more attractive than other kinds of fixed income investments, CDs, stock market investments. It looks like an attractive rate of return for some investors.”

Nonetheless, farmers are still the No. 1 buyer of farmland.

Royce Elker, director of appraisal services for Minnesota-based agricultural financial company AgStar, said farmers buying more land are “investing in their own business.”

“The positive thing is the balance sheets of farmers look better, there is more capital,” he said. “It’s easier to get money when you have more net worth and the more land you can use as collateral.”

Henderson said no declines in farmland value have been seen across the U.S in 2010, but some areas have seen slower growth than in the Corn Belt.

Texas saw just a 2.8 percent increase, and Oklahoma farmland increased in value by 1.5 percent, Henderson said.

A lot of the wheat grown in the southern plains was harvested before the commodity prices soared, holding down farmland values.

Michael Duffy, an Iowa State University farm economist, said low interest rates and high commodity prices have created a tremendous demand for farmland, but few sellers, he said.

“People are asking themselves, ‘Where am I going to put my money’ and farmland looks as good as anything and as a long-term investment it’s probably better than most,” Duffy said.

Duffy said more than half of full-time farmers rent some of the land they till or graze, and those rents will go up as the value of the land rises.

“It’s a double-edged sword,” he said. “Rents are going to go up so it cuts into the profits of the farmer, but it also increases the return to the people who own the land.”

Randy Hertz, a financial planner with Hertz Farm Management in Nevada, Iowa, said people should be cautious when buying farmland and not get caught up in the fanfare of the high prices.

Hertz said that farmland values stabilized in 2008 before dropping about 2 percent in 2009.

“So over a two-year period, the increases this year don’t look so much,” he said.