Farm Horizons, December 2014

Agricultural land values faring better than commodity prices

By Liz Hackenmueller

Despite plummeting crop prices, agricultural land values are mostly stable or only moderately declining in the local Minnesota counties of Carver, McLeod, Meeker, Sibley, and Wright.

“Corn prices went from over $7 to around $3,” said Sue Schulz, McLeod County assessor. “But our ag values are staying the same.”

Average agricultural land values in these five counties are currently between $6,700 and $8,500 per tillable acre.

“Many of us are surprised the cost of land hasn’t dropped much, because the money you can make has dropped,” said Farryl Kluis, chief appraiser with Upper Midwest Management in Faribault. Upper Midwest Management Corporation provides agricultural property management, land sales, appraisal services, and commercial property management and leasing services.

Kluis recently attended a national conference where this phenomenon was discussed – the explanation was that investors typically are looking at a five- to 10-year projection.

“So, just because there are a couple of bad years, doesn’t mean [land values] are going to drop significantly,” Kluis said.

Not all land is created equal either, and unique factors also have an impact on the sale of agricultural land.

“Our county is very diverse,” said Tony Rasmuson, Wright County acting interim assessor.

“Economic conditions, location, proximity to the metro, soil quality, zoning, and future land use will all play into the equation as it relates to the prices that are paid for land.”

Location can play a role in land value, if there is a parcel available in a desirable area, either close to already owned land, or if it is in a convenient spot for hauling commodities, which can cut down on operational expenses.

“Sometimes it comes down to the availability of the land itself,” said Rasmuson. “It oftentimes can literally be a once-in-a-lifetime opportunity for an individual to own a piece of land that he wants, and that can drive the price up.”

But, the most important consideration for land values remains the quality of the land. Investors will look at the Crop Productivity Index (CPI) of the land, which assigns a numerical value of 1 to 100 to the land based on its potential crop output. A significant factor in productivity index is drainage, according to Kluis. The higher the number, the greater potential yield from the land.

“Good, high-quality land that is well drained and has decent size with good farm-ability is steady to slightly down 2 to 5 percent,” Kluis said, noting that lower quality land is down more, often isn’t able to sell, and is taken off the market.

“The tillable land is selling – the good ground. Marginal ground has backed off. You can almost draw a line through the southwest portion of the county and that’s where we see land has increased,” said Joe Udermann, Meeker County assessor.

Fewer Sales

Although the values haven’t dropped in lockstep with falling commodity prices, the number of sales has significantly slowed down.

“The market definitely isn’t as strong as it was last year. It’s slowed down quite a bit,” Schulz said.

According to Schulz, McLeod County has recorded just 14 sales this year, compared with 33 in the same time last year.

Keith Kern, assistant county assessor in Carver County, is seeing the same trend.

“The agricultural market was at a standstill for the first six months of 2014, little to no sales activity,” Kern said. “The few sales that we’ve received so far for the last half of 2014 are indicating an approximate decline in value from 5 to 10 percent.”

Beware of averages

When looking at land values, whether considering investing or selling, it is important to be wary of averages or median prices.

“When you look at the overall sale study and what occurred, you have your peaks and your valleys. So, averages don’t give a good picture of what’s going on,” Schulz said.

Information from the National Agricultural Statistics Service (NASS) Land Values 2014 Summary, United States Department of Agriculture (USDA), shows that farm real estate values have increased close to 10 percent the past year – a very different story from what’s being seen locally.

The study also shows values hovering just shy of $5,000 per acre vs. the $6,700 to $8,500 per acre average values found in local counties.

This could be due to the quality of land, whether it’s tillable or deeded. In other words, premier farmland with mostly tillable acres will be worth more than deeded land that has poor drainage or has significant portions taken up by trees.

The USDA study is averaging the entire state of Minnesota, which can mask what is happening in local markets, considering there are large disparities even within counties.

“I can tell you that our median selling price for usable high ground is around $6,700 per acre for our 2015 assessment,” Rasmuson said of Wright County. “But the range of prices per acre of usable high ground is between $3,400 and $9,000 per acre in our county.”

In McLeod County, land values vary significantly from the southern part to the northern part of the county. More sales in the area with more premier land can drive up averages, or conversely, sales of the poorer quality land can drive down averages.

“That number is a median number, it doesn’t always give a true indication of what’s happening,” Schulz said, adding that McLeod County spans 14 townships.

Timing is everything

Now until the beginning of March (except the end of December) are usually good times to buy land, according to Kluis.

“Then the buyer can get fertilizer and seed ready and take advantage of discounted prices and prepare for planting season,” Kluis said.

With prices steady to slightly declining, now might be a good time to make an investment for someone who’s been considering it and is it in for the long haul.

“Farmland tends to be a good investment, but it’s not real liquid,” Kluis said. “It takes time to buy, develop, and sell. If you look over the past 100 years, it’s been a pretty good investment.”

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