Positive ROI Drives Bidders to Farmland Auctions

Reports are rolling in that farmers are going to plant more beans in 2018. With better-than-expected overall yields the previous two years, margins will be a little less tight for those farmers who are planting soybeans this year. Some operators might plant beans to adjust the balance sheet to lower the operating note and keep their banker happy, especially since the Federal Funds rate continues to increase.

Federal Fund Rates Increase

At the end of March, the Fed voted to raise the targeted range for the Federal Funds rate by 25 basis points to a target range of 1.50% to 1.75%.

For farmers, this means the interest on variable-rate operating loans also increased. The recent increase will represent the fourth 25-basis-point increase in the last 12 months, according to Tanner Winterhof, VP commercial banker at Vision Bank.

Maintaining a positive ROI will be imperative as farmers are preparing cash-flow projections for the 2018 crop year. It's likely the Federal Funds rate will increase again in 2018, putting those who borrow funds to purchase inputs at a disadvantage to those who can use cash reserves.

Using the Ag Decision Maker tool from Iowa State University, a farmer growing corn following a soybean crop is looking at an ROI of 5.08% for the 2018 growing year. This calculation assumes average costs from extension surveys for all expenses. The cash rent figure used was $219 per acre. The calculation also assumes a 180-bushel corn crop sold for $3.67 per bushel.

ROI Expectation From Farmland Investors

Investors are looking for a 3% to 5% ROI and the conservation reserve program (CRP) has been averaging 4.6%. This makes for a tight margin in an investment vehicle due to the fact that the federal payments for CRP can sometimes yield higher than the row-crop farmer.

Strong Demand for Midwest Farmland

Because of the positive ROI for both investors and farmers, farmland sales across Iowa and the Midwest have remained strong.

In the first quarter, there were 243 auctions in Iowa averaging $7,374 per acre. There continues to be a strong demand for the high-quality, tillable ground with a first quarter average of $9,160.

Both farmers and investors are racing each other back to the bidding table. However, we are still seeing the neighbor farmer become the winner of the bid.

Using Farmland Auctions

Buying farmland can be a good investment to increase your scale and preserve the legacy of your farm. If you're looking to purchase or sell farmland, auctions are one of the best ways to buy and sell in the Midwest. Other than the obvious fact that competitive bidding yields the highest price, auctions are also fast and transparent. Sellers get a true price discovery and provide the control to the seller. Auctions provide a guaranteed sale date and a hand over the terms of the sale. No being held hostage by "terms and agreements" of a buyer that could potentially back out at the last minute and leave the seller high and dry.

In the next 10 years, we will see one of the largest transitions of wealth in farmland that will change hands to the next generation.

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. If you or someone you know is interested in selling a farm, contact a Whitaker Marketing Group land agent and they would be happy to answer questions or provide a free evaluation of your property.