Prices for farmland declined across Minnesota in 2017, another sign of a weak farm economy that’s been plagued by low crop prices and reduced incomes for the past four years.
Experts say many farmers are dealing with land values about 20 percent lower than when the market peaked in about 2012, when commodity prices were historically high. For 2017, numbers based on fiscal year sales data reported to the Minnesota Department of Revenue and analyzed by the University of Minnesota showed that the median price per acre of farmland was $4,625, down 5.4 percent from the previous year.
“Land values are an important part of a farmer’s equity, so obviously that land component is an important part of a farmer’s collateral,” said Bruce Peterson, a former president of the Minnesota Corn Growers Association who farms near Northfield. “If that drops 30 percent, then it makes for a much more sticky situation for people in a tighter situation financially.”
At greatest financial risk are those who purchased farmland at record-high levels five or six years ago, said Mike Petefish, president of the Minnesota Soybean Growers Association.
“Falling prices are a double-edged sword,” said Petefish, who farms near Claremont in southern Minnesota. “For those that bought high-priced land and they’re using that as part of a net worth statement or collateral, certainly a decrease in land prices may strain some of those ratios and numbers that banks use to make operating loans.”
On the flip side, Petefish said, lower land prices may help those looking to rent or purchase land, especially younger farmers trying to establish a foothold in farming.
Lenders say that producers have increasingly needed to rebalance their debts and stretch out loan payments as commodity prices sank in 2014 and have remained low. Soybean prices have dropped by one-third since 2013 and corn prices are down by nearly half, well below the cost of production for many farmers.
Record yields saved many crop farmers, who generated nearly $18 billion in revenue last year. Add dairy and meat farmers, and the state says farmers pay more than $1 billion of income and property taxes.
Last week the Federal Reserve Bank of Minneapolis reported that the agricultural sector in Minnesota and nearby states remains weak but stable. Lenders responding to a January Fed survey of agricultural credit conditions indicated that farm income and capital spending decreased compared to the previous year, with further declines expected for the coming three months.
“We’re in the third to fourth year of farm stress,” said Ward Nefstead, University of Minnesota Extension economist. “At a certain point some people may have to sell land, but we didn’t see it in 2017.”
Darrell Hylen, a farmer and agent for Wingert Realty and Land Services in Mankato, said lower land prices don’t seem to be driving farmers in his area out of business, and he has seen very few financially stressed farms come up for sale.
Most farms coming to market are estates where second- or third-generation families are ready to cash out on a family farm that has been rented for many years, he said.
Prices per acre have dropped 15 to 25 percent since values reached record levels in 2012 and 2013 when corn and soybean prices peaked, Hylen said. But prices for farms with higher-quality soil have not fallen as much, he said, and increased about 3 percent in 2017.
A big part of how much a farm is worth is certainly related to the value of crops that can be grown and harvested there, Hylen said. But availability of land is also a huge factor, he said, since farms that his company has sold only come to market an average of once every 54 years.
“If a farmer has one time to purchase that land and make it part of his family operation, he’s either going to have to step up to the plate and buy it or he won’t have a second opportunity in his lifetime,” Hylen said.
Wingert sells between 50 and 75 farms per year, he said, typically about 70 percent to farmers who want to expand their operations and 30 percent to investors.
Despite the signs of continued struggle ahead, the rate of decline in land values seems to be slowing, compared to double-digit percentage drops in 2014 and 2015, and some who track agricultural economics closely are starting to see the slight bounceback that Hylen noted.
“Land values haven’t gone down as much as they could have,” said David Bau, a University of Minnesota Extension educator who has been tracking farm economics in southern Minnesota for the past two decades. “Prices are starting to hold their own.”
That’s also true in neighboring states such as Iowa, where a December report from Iowa State University showed average farmland values increasing slightly by 2 percent last year. A January report by Farm Credit Services of Omaha found that South Dakota farmland values dipped by 3.1 percent in 2017.
Adam Schmidt, regional appraisal manager for Compeer Financial, agreed that the land market has fallen about 20 percent since 2013, mostly in 2014 and 2015. “In a lot of areas we had $10,000 [per acre] sales, and now maybe the sales are in the $8,000 [per acre] neighborhood,” he said.
While the decline has been significant, Schmidt said, prices have stopped moving up or down for the most part during the last two years.
“What we’ve seen is continued strength for high-quality tracts of land while the low-quality tracts have probably continued to be softer with less demand,” Schmidt said.
Helping to bolster the value of farmland, he said, have been record or near-record crop yields during the past three years, low interest rates for borrowers and technological advances during the past decade that have made planting and the use of fertilizers and pesticides more precise.
One factor that may be affecting the market and causing some families to hang on to farms, Schmidt said, is that cash rental rates shot up when property values surged several years ago, and have remained relatively strong.
“So you end up with a lot of retiring farmer landowners that see that cash renting their land is a good investment as well, rather than sell and deal with the tax ramifications,” he said.
Petefish said that farmland rental rates near his operation in Claremont have declined by 5 to 10 percent over the last couple of years, depending on when the contracts were negotiated.
“Rents go up pretty fast when commodities are priced high, but they’re definitely slower to come down when commodities are low,” he said.
For Peterson, the limited number of sales that come to market is one of the main factors keeping a floor under land values.
“If something comes up there’s certainly many buyers interested,” he said. “A lot of them are maybe just looking in case something comes in well below market, but nonetheless there’s always farmers or investors looking to purchase land if it becomes available.”