The big news on farmland values this week was the $16,750 per acre price for Iowa farmland. Even more shocking was that it topped the previous high price of $15,368 an acre a whole week before in another part of the state. Granted, this is some top tier quality farmland with high Corn Suitability Ratings. Still, it’s shocking right? Not even a year ago, I met with a group of farmers when Midwest corn ground was hitting $7,000 to $8,000 an acre on a regular basis and the consensus was “It can’t go any higher, how will they sustain their costs.” Like the title says….Don’t Say it Can’t Go Any Higher….because it will.

In Kansas during the height of the residential boom (pre-2007) good development land that was previously pasture or maybe some farmland was going around $25K to $35K per acre. So Iowa cropland prices are absolutely amazing in comparison. However, on the flip side you will probably never hit those high corn yields on Kansas ground.

In the Commercial Connections recent newsletter from the National Association of Realtors Commercial Real Estate division, Edmond Massie makes a great observation about land that hits this high price point issue perfectly.

Land is the basis for food and the demand for food is always there so land values may continue to go even higher for high quality productive farmland that produces a diverse use crop. There has been interesting talk in the mainstream media recently on the subject of high farmland prices as well. Bloomberg posted the headline last week that Soaring Farmland Prices in US Midwest Bring Fed Scrutiny of Rural Banks. And the old faithful retired Fed Chief who has been preaching about a farmland bubble for quite some time, Thomas M. Hoening, has likely had Jason Henderson take up the microphone for him on the subject. The Federal Reserve Bank of Kansas City published an eye-popping headline this week in TEN magazine called “Growing Value: Is the farmland boom sustainable?”

Land is often referred to as “Dirt” and according to the Wikipedia definition dirt means “unclean matter” and maybe regulators and media news outlets look at it that way because of all the extreme scrutiny on the issue lately. For a real estate sector that typically only turns over historically at a rate of 3% a year and estimates show that in the last year it was closer to 1.5% due to the tight market of farmland; it is amazing to see the vast amount of attention given to the topic of farmland investing in mainstream media.

So will land prices go higher? The crystal ball does not reveal an answer today. A guess would be that farmland prices will level out and may do so quickly if there is a major uproar in the commodities markets. You will probably never see farmland go for that much in our lifetime in Kansas unless it is pre-development transitional land. Well…there you go… I said it… it won’t go any higher…in Kansas anyway!

In the midst of the stagnating economy and fears of a double dip recession, U.S. farmland and cropland values as a whole continue to be bullish. Farmland owners who made the decision to sell their current holdings should consider 2 tax deferred strategies while taking advantage of the trend.

This month the U.S. Department of Agriculture released a report stating:

“The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $2,350 per acre for 2011, up 6.8 percent from 2010. Regional changes in the average value of farm real estate ranged from a 15.9 percent increase in the Corn Belt region to a 2 percent decline in the Southeast region. The highest farm real estate values remained in the Northeast at $4,690 per acre. The Mountain region had the lowest farm real estate value, $923 per acre.

The United States cropland value increased by $260 per acre (9.4 percent) to $3,030 per acre. In the Northern Plains and Corn Belt regions, the average cropland value increased 17.2 and 16 percent respectively, from the previous year. However, in the Northeast and Southeast regions, cropland decreased by 1.3 percent and 1.1 percent, respectively.”

Top Five States

Bottom Five States

Factors Impacting Farmland Values

Fueling strong demand for farmland from farmers and investors is the result of a number of factors including:

• Low interest rates
• World demand for food commodities of corn, soybeans and wheat
• Ethanol mandate
• Weather
• Improved farm technology
• Disease resistant seeds
• Reduced supply of available farmland for sale.

In addition to farmland demand, News.Gnom.es, a national newswire service, reports that “firms like Omaha-based Gavilon, owned by Ospraie, a hedge fund associated with George Soros and Canada-listed Ceres Global Ag have been buying up grain elevators from Wyoming to Toronto.” Evidently, given the demand for grain, warehousing and transporting have been uncovered as a profitable investment warranting non-traditional investors.

Common Denominator: Tax Deferral Strategy

So, how to capitalize on the surge in farmland prices? When the decision is made to sell the farmland holdings, tax deferral strategies need to be evaluated.

• 1031 Exchange: One of those is whether to reinvest in like kind real property or not. Farmland and grain elevator businesses can be sold and capital gains taxes effectively deferred when replaced with like-kind property.
• Deferred Sales Trust: If replacement property is not the intent, a Deferred Sale Trust can provide an alternative, deferring capital gains taxes, investing the proceeds and paying the recognized gain on a schedule that suits the taxpayer.

The seminar put on by the FDIC in streaming video webinar format this morning titled Don’t Bet the Farm – Assesing the Boom in Farmland Prices was very interesting with a panel of speakers in various fields such as banking, agricultural professors and economists.  The one group that was blatantly not represented was the actual farmer or agricultural producer which was odd. It seemed that a representative from farming should have been there to give input on such an important topic.

The conclusions from most of the speakers were not really anything new or surprising as so much press coverage and media commentary has been put on this subject already.

The major points were:

• Farmland Values have risen quickly but farm income has also increased
• Interests rates are low and debt ratios are low (i.e. farmers are not leveraged as much as in the previous farm/banking busts)
• Demand is strong and will continue especially foreign demand for United States farmland crops (especially corn to China)
• Farmland value increases are not panic buying
• Farmland buyers are nearly 75% existing farm operations that are expanding and are buying with huge amounts of cash and small loans
• Investors represent a small sector of the buyers and most all of them are individual buyers (people buying back home where they grew up, non-operating farm owners that lease out to local farmers)
• Institutional buyers are less than 10% of the buyers of most farmland
• Farmland does NOT correlate with commercial and residential real estate markets.
• Extremely small amount of farmland actually on the market or being sold, farm owners do not typically sell…ever!  Those that do sell are usually non-operating owners that are 65+ that inherited the land.  There is 60% less land on the market today than ever in last 10 years.
• There are more buyers than sellers in the farmland market due to reluctance of farmland owners to sell for any reason other than consolidation or retirement.
• Almost all farmland buyers are local buyers (probably within the same county)

Some of the panel member were asked to predict what the market would be like in two years.  Most waffled but a couple answered straightforward.  The investment fund (REIT) Manager, Shonda Warner predicted that farmland prices would be stabilized.  An agricultural professor from Purdue suggested that prices will go even higher.  So what will happen?  Time will only tell.

The panelist slide shows should be on FDIC.gov later today and next week the video file will be posted for viewing.  It was an interesting overview especially from the banking prospective.

There has been a lot of buzz lately about the land market. Parts of Iowa have experienced skyrocketing values in cropland; recreational land markets are stagnant and disturbingly low values have been seen in development land all across the nation. Even the overlooked sector of farmland received some major press over the last couple of months after the Annual Land Values report by the USDA was released. So where does all of this leave the average farmer or farmland investor?

The housing market crash made it seem that all markets including land had been wiped out. In reality though, most land, specifically agricultural farmland has continued at its historical slow and steady pace. The breadbasket of America where most farming and the bulk of farmland transactions take place is known as the Heart of America. In fact the Great Plains includes the precise geographical center of the United States located in Smith County, Kansas which literally puts farmland values right in “The Middle Ground”.

Much of the Great Plains States (generally considered Kansas, Nebraska, North Dakota and South Dakota) have seen steady increases in land values over the last few years but very few areas experienced double digit growth in the agricultural sectors. In fact the Plains states actually were the reason for the average value of US farmland growing 1.4% from 2009 according to the United States Department of Agriculture. So how do you define going up in value for land? Typically, land prices are quoted in per acre prices on farmland and pasture. So if you are looking at $1000 an acre vs. the new increased value then it is $1014 an acre. While increases in value are certainly newsworthy I am not sure if that constitutes a land rush.

It is true that demand for farmland has remained solid especially from existing farmers looking to expand. This is precisely why the markets have held firm because farmland is currently a scarce commodity as most producers are keeping their holdings. Therefore, when business news experts report that you should rush out and buy land and then you get out there and do not find much prime land available, you will know why.

Recreational, hunting and small acreages may flood the regular listing outlets like the local Multiple Listing Service (MLS) but top quality farmland most likely will not ever see the listing service. Invest some time in researching the areas you might want to consider and then start networking with local farm credit lenders and a local land expert. Most land is sold to neighboring farm operations and not big institutional investors as some of the news stories may have you believe.

Land will always have a demand because we have a finite amount and that inherently keeps the risk lower than most investment options. Rural farmland of even average quality can provide a consistent income on a property and maybe even provide you some recreational value as well during your ownership. If you want to avoid the highs and lows and stay in the middle ground, then consider farmland.