How Are Farmers Affording High Land Prices?

In Iowa, farmland values and sales declined slightly in January, but there was an uptick in February with a hot market. We watched land sales from all over the state come in with phenomenal figures.

A sale in Sioux County, Iowa, reached $18,360 per acre, which marks the highest selling farmland in 2018. In central Iowa, we saw most of the sales of good tillable farmland yield over $10,000 per acre with many bringing in closer to the $11,500 range. These prices deemed a successful February for farmland sales. Overall, trends are on the rise for quality farms. I always say, "Good ground sells good!"

There are more farms coming to the market in March and April as we approach planting season, and there's new interest from investor buyers and groups that are bidding the price up at auctions. Investors are now competing against the neighbor farmer who usually is the unchallenged bidder and then ends up buying the ground. Interest in purchasing recreational ground is also on the rise. We've received calls from out-of-state investors who were interested in seeing recreational ground during their stay in Iowa for the Iowa Deer Classic.

Multigenerational investments

But the question on everyone's mind seems to be, "How can land prices be so high with commodity prices so low?" Buying farmland never makes sense the day you buy it. Owning land is a multigenerational investment.

A 110-acre Delaware County farm was auctioned in November 2017 for $9,000 per acre. According to the realtor, the family purchased 120 acres in 1950 for $175 per acre, which included a house and farm outbuildings. The family sold off 10 acres, which included the farmstead about 10 years ago for an undisclosed amount. For simplicity's sake, let's say this was a 110-acre farm bought in 1950 for $175 per acre. Over a 67-year period, the value of this farm grew from $175 per acre to $9,000 per acre. This indicates 6.06% compounded appreciation per year. Add 3% for annual return and that equates to a little over 9% per year.

This is what land buyers want: an investment with a low amount of risk with a good return. The day this family bought this farm in 1950 they thought they paid way too much and the neighbors thought they would never pay it off. Almost seven decades later, this was likely the best investment this family ever made.

Dollar Cost Average

Even with low commodity prices, farmland prices have remained consistently high, equating to a good return on investment with a low risk threshold.

Farmers who are buying land at these high prices are dollar cost averaging. If a neighbor farmer buys a new 160-acre farm for the sale price of $10,000 per acre, he will average his new purchase with 300 acres he rents from his parents at a rate of $200 per acre and the 500 acres he owns. The farmer pays taxes on the land he owes for around $15 dollars per acre. The new land that was purchased was financed over 20 years at 3.75% with $100,000 down has an annual payment of $110,973.11 or $693.58 per acre. If you look at the dollar cost average all three types of farms, (owned, rented, and new land) the average is $186.43 per acre. So even though the buyer paid a price that he had to finance at nearly $700 an acre, when we dollar cost average all the land together, he is paying less than $200 per acre. The farmer also has the ability to run current equipment over more acres, which lowers the cost per acre of equipment. It also means buying more inputs, which may lower the collective cost.

It is not any easier being a farmer now than it was years ago. In fact, it's riskier. When corn prices were at $2 per bushel, the land prices, equipment, inputs, and every other expense were relative in price. Since commodity prices had soared to $7 and then came back down to the mid-$3 range, the expenses have all remained the same, not following the commodity prices. It now takes any farmer, new or old, millions just to play the game.

Farmers need to remember that the money is made in the margins. Whether we have $3 or $7 corn or $3,000 or $10,000 farmland, farmers need to make sure that they are calculating the difference between what they put in and what they get out, especially when considering the purchase of new farmland.

Written by David Whitaker, the owner of the auction and real estate company Whitaker Marketing Group. Dubbed the "Iowa Land Guy," Whitaker specializes in farmland auctions and also farms with his family outside Ames, Iowa.