Farmland prices in Minnesota continue to soften as prices for corn and soybeans remain relatively low and the outlook for 2016 appears to offer marginal profits for many crop growers.
The changes are part of a pattern of falling values for farmland in much of the central U.S., according to several reports published within the past week.
An analysis by the University of Minnesota Department of Applied Economics found that the average median price of farm real estate in Minnesota dropped 5.5 percent during the first nine months of 2015, from $4,878 to $4,611 per acre. The median is the price at which half of the transactions are higher and half are lower, and is considered a good measure to gauge price trends at the state or regional level.
The change in land prices is important, because double-digit price increases a few years ago reflected an agricultural boom in rural Minnesota. But many growers, bankers and others expected that land prices would level off and begin to decline after corn and soybean prices peaked in 2012, dropping by about 40 percent since then.
Cash payments for Minnesota corn generally have stuck between $3.25 and $3.60 per bushel in recent months, below the cost of production for many farmers.
“The drop in commodity prices would be the main thing — and farm income prospects,” said William Lazarus, a professor and Extension economist at the U.
The U report also found that another measure, the average or mean price of farmland, has followed a similar downturn. The report is an annual update of farm real estate prices based on actual sales transactions that are required to be reported to the Minnesota Department of Revenue.
The findings ring true for Darrell Hylen, a farmer and agent for Wingert Realty & Land Services in Mankato, which sells 60 to 75 farms a year, mostly at auction.
Sales prices were down 5 percent during 2015 for Wingert, Hylen said, with additional declines likely ahead until grain prices improve.
“The quality land from the peak in 2012 has dropped off 20-plus percent,” he said. “The marginal land that’s not as productive has seen about a 33 percent reduction since then.”
Even so, Hylen said sellers who missed the best time to sell at the highest prices are still getting far more per acre than they would have dreamed a decade ago. And he said the combination of low interest rates and farmers with relatively low debt means that land values may soften, but they won’t likely plummet.
“We still have farmers out there with good balance sheets, but they’re being more selective and more cautious as they make purchases and move forward,” he said.
Jeff Swanhorst, executive vice president and chief credit officer for AgriBank in St. Paul, has seen Minnesota cropland prices drop almost everywhere in the past year from 0 to 9 percent, depending on soil quality and other factors. The exception has been pasture land, he said, which has held its value better because of the stronger dairy economy and profits in 2014.
The wholesale bank provides funding to retail farm credit associations in 15 states, which in turn make loans to farmers. AgriBank analyzes land price information from the U.S. Department of Agriculture (USDA) as well as appraisals of 230 benchmark farms in its service area.
“What’s behind this [cropland value decline] is that we’ve had a major reset in commodity prices over the last two or three years,” Swanhorst said. That means less net income for growers, who don’t have as much money to purchase available farmland.
But there’s also a larger factor driving land prices downward, he said. “Whether it’s a farmer or an investor that’s buying ag land to rent it, they’re all driven by what the income-producing ability of that property is,” he said.
Contributing to the listless crop prices are bountiful supplies of grain from around the world and lower demand from abroad for U.S. crops, largely due to the relative strength of the dollar against world currencies.
Swanhorst said the outlook for continued low crop prices is likely to remain unchanged for the next few years, unless there’s a major drought in the U.S., Brazil, Argentina or other large grain-producing areas.
“This [down cycle] is not abnormal for agriculture, but it’s different from where we’ve been in the last five or 10 years,” he said.
The University of Minnesota report warns against reading too much into statewide average land prices, because they can vary considerably. The value of a single farm depends on its soil type and fertility, location and other factors, it noted. Median prices in southwestern and south-central Minnesota were around $7,500 per acre in 2014, for example, while sales in central and west-central counties were more in the range of $4,450 to $4,800 per acre. Other factors affecting price might be the land’s potential for nonfarm development and how much neighboring farmers may bid it up, since some farms only come on the market once every few decades.
Midwestern bankers surveyed by three district Federal Reserve Banks have underscored that falling farmland values are trending across most of the central U.S.
The USDA also has examined how weakness in the farm economy is beginning to press down the costs of renting farmland. Its surveys of producers last year found that rental prices overall between mid-2014 and mid-2015 declined for the first time in 20 years, with some of the biggest drops, ranging from 2.5 to 4 percent, in Minnesota, Michigan, Iowa and Illinois.
The USDA also projected last week that net U.S. farm income would fall in 2016 to the lowest level since 2002.
Hylen said all of this means that growers are in a transition period, trying to adjust land rental and other costs downward to stay in line with grain prices that for many are at or below the cost of production.
“We’ve got to get profitability back into farming,” Hylen said. “We’re in different territory right now.”