Farmland Values Continue to Increase

By Kent Thiesse Farm management analyst kent.thiesse@minnstarbank.com

Farmland values in the Upper Midwest have continued to move higher early in 2023, surpassing the highest levels ever in many areas. Many locations in the Upper Midwest, except for portions of Western Minnesota and Iowa, South Dakota, Nebraska and Kansas, experienced average to above corn and soybean yields in 2022. These solid yields, combined with the highest crop prices in several years that existed throughout most of 2022, helped boost final 2022 farm income to some of the highest levels that we have seen in many years. The enhanced farm income levels have resulted in sharply higher land values in many portions of Iowa, Minnesota and other areas of the Upper Midwest. Land values have also been enhanced by very strong buyer interest in purchasing farmland and a limited amount of land being offered for sale in many areas. Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farmland sales. The Iowa State Land Value Survey is based on actual land sales in Iowa over a 12-month period, as well as from reports by agricultural professionals that are knowledgeable regarding land market conditions, including appraisers, farm managers, and ag lenders. The complete 2022 Iowa State Land Value Survey results can be found at: https://www.extension. iastate.edu/agdm/

(Note – Refer to the Table at the end of this column for a summary of Iowa land values from 2008-2022.)

The average value of Iowa farmland in 2022 was $11,411 per acre, surpassing the 2021 average of $9,751 per acre, which previously was the highest average land price ever recorded since the Iowa State Land Value Survey was initiated in 1941. Since the recent low point of $7,183 per acre in 2016, the Iowa State Land Value Survey has shown an increase of 59%, or $4,228 per acre, in the past six years (20162022). This includes a 51% increase in land values in a span of two years from December of 2020 until December of 2022.

The average land values in 2022 increased in all 99 counties in Iowa, as compared to 2021 average values.

Eight of the nine Iowa crop reporting districts had at least a 13% increase in land values in 2022, with Southeast Iowa being the exception with a 9.8% increase. The greatest increases were at just over 22% in both the northwest and southwest districts. The northwest district reported the highest 2022 average land value in Iowa with an average of $14,878 per acre, with the north central, west central, east central and central districts all averaging over $12,000 per acre.

Trends in farmland values in Southern Minnesota have been tracking very closely to the trends shown in the Iowa land value survey for northern crop reporting districts in Iowa. Similar to many areas of Iowa, land values were much higher in 2022 in most portions of Southern Minnesota due to the much higher commodity prices and average to above average crop yields in many areas. There have been many land sales across Southern Minnesota that have topped $10,000 per acre in the past 12 months, with some isolated sales nearing $15,000 per acre. Even with the higher land values, there has continued to be a gap between the average land price for high quality, welldrained farmland compared to lower quality land that is poorly drained. The number of potential buyers interested in purchasing farmland has also increased in many areas of Minnesota.

Based on the recent Iowa State Land Value Survey, farmers accounted for approximately 72% of the farmland purchases in Iowa in 2022, which was primarily existing farm operators that were expanding their owned land base. The remaining 28% of farmland was purchased by real estate investors, with about half being retired farmers and other local investors and the other half being non-local investors. The main reasons listed for the strength in farmland values were the continued high commodity prices and strong farm income levels in 2022, the limited supply of land offered for sale and the continued low interest rates in the first half of 2022. The survey indicated that there continues to be strong interest for purchasing land among farmers as we entered 2023.

Data released in late 2022 by the Federal Reserve Districts across the U.S. showed similar trends in average land values in the Upper Midwest at the end of 2022, compared to a year earlier. The highest 12-month percentage increases at the end of 2022 were North Dakota at 30%, shared three stories: the lost sheep, the lost coin, and the lost son. A shepherd searches for his lost sheep until he finds it. A woman searches for a lost coin until she finds it. And a father eagerly awaits the homecoming of his lost, wayward son, and then throws a party to celebrate his son’s safe return. Actually, if you know the parable of the lost son, you might realize that the father had not one, but two lost sons. The younger, prodigal son left home and was lost for a time as he wasted his inheritance. But he eventually returned home to his father. The older son stayed at home, but was in essence, “lost” to his father. For when the younger son who had been broken by the hard knocks of life humbly returned home, the older, self-righteous son refused to join the homecoming celebration thrown by his joy-filled father. Spiritually speaking, have you been, or are you presently lost from God? Have you wandered away from the home of your Father God and wasted your life in godless living? Are you ignorant of, or have you forgotten God’s love, grace, and mercy? Have you strayed from His commands? Do you sense a real distance between you and the Lord? And do you sometimes refuse to celebrate with the family of God over another sinner who repents and returns? The Lord loves lost peo- ple. Jesus stated His purpose for coming to earth in Luke 19:10: “For the Son of Man came to seek and to save the lost.”

Way of the Cross to be featured on WCCO Television.

On Wednesday, April 5, the Way of the Cross shrine will be featured in a special “Finding Minnesota” segment to be broadcast on WCCO Television (Ch. 4) during the 10 p.m. news. The segment will air again on Thursday morning at 4:30 a.m. and repeat on Easter Sunday around 10:30 p.m. on WCCO. It will also be available to view on WCCO.com (CBS Minnesota).

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Indiana at 29%, Kansas at 27%, Minnesota at 24% and Iowa at 22%. Nebraska and Illinois were at a 20% increase. South Dakota, which was hard-hit by drought last summer, was still at a 13% increase in land values in 2022.

The U.S. Federal Reserve has increased the prime interest rate by 4.50% in the past 14 months, increasing the prime rate from 3.25% in early 2022 to 7.75% in early March of 2023. The Federal Reserve continues to discuss the likelihood of further increases in the prime interest rate during the balance of 2023. Prior to 2022, the prime rate interest rate had not changed in nearly three years, which provided a stable financing environment for buyers of farmland.

• 4.00% Interest Rate = $51,511 per year P & I payment

• 5.00% Interest Rate = $57,158 per year P & I payment

• 6.00% Interest Rate = $63,078 per year P & I payment

• 7.00% Interest Rate = $69,251 per year P & I payment

• 8.00% Interest Rate = $75,656 per year P & I payment

From early 2022 until March of 2023, that represents an increase in the estimated annual REM principal and interest payment of over $24,000 per year.

On 160 acres of farmland, this values to remain fairly steady in the next 12 months, while 28% forecast a decline in land values in Iowa by the end of 2023. When asked about farmland trends over the next five years, 60% of the respondents expect land values to increase by 10-20%, while 24% feel that future land values will decline in the next few years. Currently, most signs point toward continued strength and even potential further modest increases in land values in the next 12 months. However, there are some lingering “caution flags” that could potentially reverse this optimistic trend and revert to more downward pressure on land values. These potential challenges include:

• Return to lower crop prices and lower profitability in crop and livestock farming.

• Further increases in longterm interest rates by the Federal Reserve Bank in the next year.

• Changes in federal policies, such as estate taxes, capital gains taxes or 1031-exchange policies.

• Reduced interest to purchase farmland or a large increase in the amount of land being offered for sale.

• Lack of confidence in the land market by farmers, investors and ag lenders.

Following is an example to show the impact of the rapid rise in long-term interest rates.

Assume that a land buyer pur chased an 160-acre parcel of farmland and financed $5,000 per acre ($800,000 total) with a 25-year amortized real estate mortgage (REM). Following are the estimated increase in annual principal and interest (P & I) payments as the long-term interest rates have increased: would add over $150 per acre to the annual cost of the land.

As part of the 2022 Iowa State Land Value Survey, the respondents were asked their opinion regarding the future direction of farmland values. Fortyeight percent of the respondents expect Iowa farmland values to increase by 5-10% by the end of 2023, as compared to the end of 2022. Twenty-four percent of respondents expect farmland

As we enter a period of increased crop input costs and tighter margins in crop and livestock production, farm operators need to be more cautious on over-extending their farm business to purchase land. This is especially the case for beginning farmers and those borrowing a significant amount of money that will be impacted by the increasing long-term interest rates. It is best to sit down with a good farm business financial advisor or ag lender to analyze the potential financial impacts on the farm business before finalizing the farm purchase decision.

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