B10 • DAILY NEWS
THURSDAY, FEBRUARY 21, 2013
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Farmers have extra revenue and have decided to invest in machinery and land. Locally, there has been some land auctioned off and other areas that attribute to high prices are land quality and location. There is more value for sugarbeet land located next to a piling station as compared to acres further out that loads need to be trucked in. “In many cases it comes down to a bidding war that has been driving prices as well,” Olson said. A better return on their investment is a contributing factor as well. “If you only get 1-3 percent return outside of ag and 5 percent return in agriculture, farmers will invest in agriculture. In the case of supply and demand, the more demand, the more people are willing to pay for it.” Many people have heard about isolated pockets of land selling for $6,000-$7,000 an acre. Olson cautioned people to put these sales into a realistic scenario. People hear about the high land sales and assume their land should be worth the same, if not more. “We’ve got to be careful of the difference between marginal and average,” he cautioned. “The average cost of my land as a landowner can be different from an extra 80 acres I just bought as compared to buying larger tracts of land. The prices we hear about in the coffee shop are marginal acres.” Farmers are willing to pay higher prices for smaller tracts of land versus what they are willing to pay for larger tracts, Olson said. The land value has to sustain what the farmer can recover in their crop. It also goes back to supply and demand. If there is an extra quarter of land available for purchase and 10 farmers bidding on it, the price will reflect the high demand and limited sup-
ply. However, if there are 10 farmers trying to buy and 20 quarters available for purchase, the supply is higher than demand and the prices will reflect a lower price per acre. “That’s what makes this a complicated issue,” he said. “You can’t point to one thing, there is an interaction of a lot of different forces.” Some people remember what happened in the late 1970s when there was an agriculture boom. It caused a lot of excitement in the agriculture community when the Russian market opened up and a huge amount of grain was exported out of the United States. Officials predicted the export sales would continue to grow and farmers aggressively bid up land values. In the early 1980s the market busted, Olson said, and the price of land took a severe plummet. Cost caught up with revenue and margins were thin. Producers also had high interest rates taken out on their loans, with many farmers agreeing to variable rates of interest on those loans. The lower prices and cost caught up to the market and the thin margins and high interest rates made for a depressed farming economy. This is a duplicate of the housing market seen a few years ago, he said. In four to five years during the mid-80s, the land values dropped 50 percent due to the financial stress. Many farmers faced foreclosure and the U.S. government began a support program. “Many of the people who lived through that are now toward the end of their careers and say the land prices looks similar to what happened in the ‘70s and ‘80s,” Olson said. “But this current trend is acting differently.” A major difference between these three decades is the low interest rates currently available. Most farmers are locking their interest rates and ag
lenders are only going to loan a certain percentage of the value. In the 80s, land purchases were 80 percent financed, Olson said. “Today, 60 percent of the value is financed with lenders forcing farmers to put up a larger portion of the money. There is a wildcard, though, in this scenario and it is unpredictable. Olson doesn’t know what will happen with commodity prices. In the United States there are a lot of crops produced and a higher supply will cause prices to fall. But is this current trend a boom and bust crisis? Experts say the odds of this happening are low. “What might happen? Have we plateaued?” he asked. “That is a good question and no one knows the answer to it.” There are some issues that affect price: Drought, crop prices, good production and lower interest rates. When linked together, Olson said they can affect land prices. If the stock market takes off, other investments may look more profitable and instead of investing in land, farmers may decide to invest somewhere else. Land needs to be competitive in return rates of investments. Currently, land is tending to rate a higher return, he said, but it isn’t always true. “What farmers pay for interest rates and what rates of return they can gain in their investments is the other piece of what is driving land values,” Olson said. “Interest rates are very low now and interest rates influences what farmers can afford to pay for land.” In agricultural practices of today, farmland is a scarce resource. Producers can make more tractors, seed, chemicals, fertilizer and more, but the limiting factor in today’s mechanized agriculture is access to farmland. This finite piece of the pie is the true factor driving the price.
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LAND PRICES: Experts says odds of boom reoccurring are low
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COURTESY METRO CREATIVE GRAPHICS
There are many factors for what is driving some land sales, including emotional attachment and location.
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