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Land value increases slowing but odds against major collapse

By Jean Caspers-Simmet
simmet@agrinews.com

Date Modified: 01/27/2014 10:08 AM

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AMES — Extension farm management economist Mike Duffy said while Iowa land values have slowed from meteoric leaps seen in recent years, the odds are against a major collapse in land values like that seen in the 1980s.

"The current situation, with respect to Iowa land values, was described by one of the respondents as being a plateau," said Duffy in his analysis of 2013 Iowa Land Value Survey. "He based this comment on his observation there had been some very strong sales in his area, but there also had been some weak or no sales at recent auctions. This was a sentiment echoed by many of the respondents."

Strong and weak price sales occurring at the same time indicate a market in flux, Duffy said. The key is if this shows the market is going to settle into a plateau, if it is just pausing before another takeoff in values or if the market has peaked and is due for a correction.

The single biggest factor to assess land value movement is gross farm income, Duffy said. Any asset held in perpetuity is valued by income divided by a capitalization rate. The capitalization rate is important, but income or expectations for income appear to have the major influence on land values.

A majority of this year's land value survey respondents were concerned about income with more than three-fourths, 76 percent, of the respondents cited lower commodity prices as a negative factor affecting land markets, Duffy said.

The rate of increase in land values slowed and commodity prices started dropping after June 2013, Duffy said. In Iowa, corn and soybean price movements are good indicators of gross farm income movement. A 33 percent drop in the Iowa average corn price occurred from October 2012 to October 2013, and there was an 11 percent drop in soybean prices during the same time. The November estimated price for corn was 39 percent lower than the November 2012 price. Soybean prices were 11 percent lower.

The gross value added for the agricultural sector increased 28 percent from 2008-12, and net farm income increased 40 percent during the same time, Duffy said. Projections for 2013 aren't available at the state level, but current national forecasts show that cash projections are lower but total gross income and net farm income both increase, but at a lower level than the past few years.

Marketing year prices for corn dropped 12 percent from 2008 to 2009, and soybean prices decreased 7 percent during the same time, Duffy said, adding that 2009 is significant because it was the last time land values dropped statewide.

"We are in a situation similar to 2009 where commodity prices dropped," Duffy said. "Will commodity prices rebound as they did in 2010, or will they continue down? This is the key to which way land values will go."

Duffy said he sees many competing forces that will influence prices during the coming years. For now, it appears there are more factors that will lead to lower prices. What land values will be supported by $4 corn remains to be seen. Given the variable weather conditions of the past few years and world economic conditions, the question remains if prices will settle into a trading range or will there be wide swings. The effect of this situation on land values isn't known.

"The odds are against a major collapse in land values," Duffy said. "But, if projections of a new lower level for commodity prices hold then we should expect land values to drop. The impact of lower income and declining land values will depend on the individual situation. In the 1980s, the collapse impacted almost everyone. What will happen this time will be a slower adjustment to the new price/income realities. Some people will be hard hit by the lower cash flow and income but that depends on how they are situated financially."

There have been three "golden" eras for Iowa land values during the past 100 years, Duffy said. The first one ended in a long, drawn out decline in land values from 1921-33, the second golden era ended with a sudden collapse from 1981-86.

"How this third golden era will end isn't known at this time, but it would appear that it will be a more orderly adjustment rather than the sudden collapse," Duffy said.