With farmland representing 82 percent of total asset values in production agriculture, economic and policy uncertainties have sellers, buyers and lenders “figuratively holding their breath” to see what happen next with land values, according to Randy Dickhut, senior vice president of real estate operations, Farmers National Company (FNC).
Based out of Omaha, Neb., the real estate services organization does business in a 28-state area encompassing the Midwest, including Michigan. According to Dickhut, FNC is noticing an uptick in land sales activity.
“We’re seeing more landowners coming to us to market and sell their land as evidenced by our volume of land for sale increasing 21 percent,” Dickhut said. “These landowners are just deciding now is the time to sell and capture today’s price.”
Overall, agricultural land values have held up surprisingly well over the past few years despite lower commodity prices and much lower farm incomes compared to five years ago. Within Michigan, the three-year trend for “High-Quality”, non-irrigated ground has shown only a minor downtrend thus far, dropping from $6,200 per acre as of Jan. 2017, to $6,200 per acre for January 2018 and 2019.
Dickhut attributes persistent land values to lower availability of land for sale previously, cash rental rates remaining stronger than expected and interest rates that have been historically low. But there are some red flags and looming questions about what comes next.
Even though the rate of bankruptcies and forced land sales is low, there is the expectation that numbers will increase somewhat in the year ahead as farmers’ cash flows are stressed, according to Dickhut, citing economic and trade concerns, which are hurting profitability.
“There is also an increase of quiet sales to neighbors or investors where the land is never exposed to the market to see what the true price is,” Dickhut said. “The ultimate question here is how many more properties for sale can the market handle before the volume overwhelms the number of buyers and puts downward pressure on land prices?”
Regional and commodity-specific differences are also becoming more evident and have a bearing on land prices. Dairy producers, particularly in Wisconsin, New York and other states are now seeing an increase in retirement sales involving land and assets.
Dickhut adds that other regions did not experience the record crop yields in 2018 that other areas did, adding to producers’ financial stress and resulting in additional farmland entering the market.
A series of interest rate increases in 2018, with rumors of two to four more possible increases for 2019 has also caught the attention of landowners, lenders and producers. Higher rates not only affect borrowing costs, but also influence capitalization rates for land investors.
“The overriding question in the land market is about supply and demand,” Dickhut said. “At this time, there are enough buyers at most sales to bid up the price to a good level for the seller. But as we move ahead over the coming months, will buyers become even more cautious than they are now?