Cashing in on cropland: farmland prices are on the riseBolstered by strong crop prices and record-low interest rates, agricultural land values are soaring across the Upper Midwest.
By: By Karen Rivedal, The Wisconsin State Journal, Superior Telegram
Bolstered by strong crop prices and record-low interest rates, agricultural land values are soaring across the Upper Midwest.
On average, Wisconsin farmland prices rose 13 percent in the first quarter, according to the Federal Reserve Bank of Chicago, compared to January through March of 2011.
In the five-state Federal Reserve district including much of Wisconsin, prices were up 19 percent, Reserve economist David Oppedahl reported in his most recent survey. The district also includes all or parts of Illinois, Indiana, Iowa and Michigan.
In Dane County, prices rose 7.6 percent to an average $5,851 per farm acre from 2010 to 2011 -- according to a study by the UW Center for Dairy Profitability -- and by 11 percent between 2006 and 2011.
The center also found farmland values statewide rose 6.7 percent in 2011, to $3,475, and by 31 percent over the past six years in south-central Wisconsin, or from $3,739 to $4,902 per farmland acre.
"Agricultural land values have continued to be a bright spot in the otherwise weak real estate market," said A.J. Brannstrom, a farm management specialist who does the center's annual farmland surveys.
Brannstrom also noted price per acre for farmland was highest in southeast Wisconsin last year, but had appreciated across the state, amid increasing competition for land.
Oppedahl described district farmland values as appreciating "substantially" in early 2012, following an even faster rise of year-over-year growth in every quarter of 2011 -- by 19 percent, 22 percent, 25 percent and 22 percent, respectively -- according to quarterly surveys of bankers in the district.
Values also rose by 10 percent and 14 percent in the last two quarters of 2010, the surveys showed.
Beyond price increases, the surveys showed increased demand to buy farmland in the six months ending March 2012, plus other factors supporting an agricultural real estate boom, including:
--More farms sold.
--More acreage sold.
--More ag land for sale.
Farmers' credit at district banks also remained solid, Oppedahl reported, with loan repayment rates and the availability of money to lend both at their highest level in decades.
And this boom benefits more than just farmers, Oppedahl said.
"Farmland values being up helps the states' economies," he said. "You need to be able to have agricultural activity be self-sustaining. If you had a situation where farmers couldn't expand and fund their operations, that's an issue."
Behind the boom
Oppedahl and other farm experts traced the rise in farmland values mostly to higher prices for corn and soybeans, which dominate the district's ag products. Partly due to increased ethanol demand, prices for corn and also soybeans rose in 2007 and 2008, fell a bit in 2009 -- along with milk prices -- and then rose again in 2010 and 2011.
"Over the last five, six years, prices received by farmers have been pretty strong," said Bruce Jones, an agricultural economist at UW-Madison.
"So the returns from owning land have been good, and as a result we have an increase in buying farmland, because you lock down a production base that way."
As Oppedahl put it, "You could produce more and get paid more if you could plant more, so farmers started to buy more farmland to expand."
At the same time, farmland became easier to buy as well, as interest rates on farmland mortgages dropped, much as they did in the residential market after the housing crash in the middle of last decade.
How farmland differs
In addition, farmland may hold its value better than other types of land because it's so flexible, Oppedahl said.
"The basic idea is that farmland is not only an asset that retains its values, but it gains value based on the productivity of the land," Oppedahl said.
"You're not just owning a house where you get no income unless you use it as a rental property. With farmland, you can make it earn what you want it to earn, in the sense that there are many options."
Beyond commodities like corn and soybeans, a larger segment of district farmers are branching into alternative products that can be more lucrative, he said.
"What's increasingly popular is marketing yourself in the organic or local foods or farmers' markets in an area," he said. "Then you can increase your income with fruits and vegetables as opposed to commodity-style agriculture."
"You could even offer some hunting on wooded land, or maybe start having some agri-tourism," he added. "There are income-generating possibilities that are not available to owners of most other types of properties, that can increase the value."
What could go wrong
When pressed for any downsides to the farmland boom, Oppedahl noted that the high mortgage payments from expensive land buys always pose an operational risk to farmers who are unlucky or not careful enough.
"There is the sense that farm operations are more challenged to be able to make their margins, when you're dealing with land that's been purchased at very high prices," he said. "Some could overstretch themselves, if they're not aware of and planning for the volatility that is very apparent in crop prices. You have to be a good marketer to be able to make things flow properly."
And despite the general upward swing, Brannstrom noted farmland prices vary substantially across the state, depending on the land's location, quality, size and other factors.
"In parts of the state where dairy farming is a bigger factor, those areas haven't increased as much as parts that are more dominated by corn and commodities," Brannstrom said.
Lodi-area grain and livestock farmer Keith Ripp was not 100 percent happy about the land value boom, noting it was a double-edged sword and he had experienced both sides.
A few years ago, Ripp said, he sold some land for a good price to help a younger farmer get started.
"It worked out, right time, right place," he said. But now, he's the one who needs to buy.
"My two boys are looking to get started farming," said Ripp, who also is a state lawmaker representing the Assembly's 47th District. "We can do several things to make it work, but we'd like to expand our acreage, and that's tough to do."
In Wisconsin, between 2001 and 2010, farmland prices rose from $2,000 to $4,500 per acre, Jones said, citing ag statistics kept by the state Department of Agriculture, Trade and Consumer Protection.
Other reasons for rise
Ripp also offered a couple more reasons that land prices are increasing in Dane County, in addition to the good commodity prices and low interest rates. He said the county's population, Madison's convenient location and young farmers wanting to expand farms all add to the equation.
"Dane County certainly has the population (to farm successfully), and the convenience of traveling to and from Madison is a big plus," Ripp said. "You also have the next generation coming into the farms and wanting to expand them, whether it's for dairy or livestock or cash grain operations."
Competition with developers for farmland in Dane County also can drive up land prices -- but Jones noted that in the last six years non-farm demand for county farmland has dropped, as the residential and commercial building industries tanked during and after the recession.
"Most of this movement is farmer-driven, (not) developers," Jones said.
Brannstrom also cited another reason some farmers are looking for more land now: as dairy operations expand, more land is needed to dispose of the animal waste safely and economically.
"It's a means to find a reliable disposal site for excess nutrients," Brannstrom said. "If you don't have to carry the manure far, that's worth a lot of money."
Looking forward, Oppedahl predicted an easing or moderation in the pace of rising farmland values throughout 2012.
In his latest survey of bankers, nearly two-thirds predicted farmland values to stabilize this year, while about a third of them predicted more increase.
Only 1 percent said land values would decline.
(c)2012 The Wisconsin State Journal (Madison, Wis.)
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