While the Midwest has been battered in recent years by manufacturing job losses and price drops in residential and commercial properties, farmland has become a bright spot in Midwest real estate.

As commodity prices surge, farmers and investors across the Midwest are bidding up farmland at auctions, prompting values to soar.

Investors in Corn Belt farmland saw a 14 percent return last year on the land, which includes appreciation and income from renting it to farmers, according to the National Council of Real Estate Investment Fiduciaries.

As the agricultural economy continues to thrive, farmers are having less incentive to sell, which is creating a low supply of land that is high in demand.

 

"Prices continue to increase due in part to the limited supply," says Randall Pope, chief executive officer of the Westchester Group Inc., which manages farm tracts. "There are a number of people who would like to buy these days but there isn't a lot of product on the market."

For example, investors bid up prices in an auction last month for 120-acres of farmland in Greene County, Iowa. The winning bid offered $8,200 an acre--nearly $1 million, which was 44 percent higher than the $5,701 per-acre estimate for average values in the county.

 

Sheila Bair, Federal Deposit Insurance Corp chairperson, warned in October that a bubble may be forming in farmland real estate. But that hasn’t seemed to turn away investors.

 

Analysts predict farmland prices will continue to climb. Values in Iowa, which is the largest corn and soybean-growing state, climbed 16 percent in 2010 and are expected to increase another 10 percent this year if commodities remain at current levels.

Source: “Value of Midwest Farmland Climbs,” Bloomberg News (Feb. 21, 2011)

http://www.realtor.org/RMODaily.nsf/pages/News2011022303?OpenDocument

Much of the U.S. economy has been slow to recover from the recession. That hasn't been true of farmland markets, which have continued to climb, a group of Purdue University agricultural economists says.

Strong crop returns, very low interest rates and a growing expectation that both might continue have had a positive influence on farmland values, said Mike Boehlje, Chris Hurt and Brent Gloy.

"Even while some residential and commercial real estate values have been falling, that has not been the case for farm real estate," Boehlje said. "Instead, we've seen some high prices for farmland in recent months, even exceeding $10,000 an acre in some extreme cases."

Boehlje, Hurt, Gloy and fellow Purdue agricultural economist Craig Dobbins examine farmland value dynamics in their paper "Farmland Values: Current and Future Prospects." The paper can be viewed online by going to http://www.agecon.purdue.edu/commercialag/progevents/landvalueswebinar.html and then clicking on the link.

The four economists and Bruce Erickson, Purdue's director of cropping systems management, will discuss farmland values during a free webinar 1-2 p.m. EST Monday (Jan. 10). To register for the online event, visit the website above.

Farmland values have risen steadily since 1987 but have shot up in recent years. Between 2000 and 2010 the average price per acre of average-quality Indiana farmland - land capable of producing an average corn yield of 155 bushels - rose from about $2,300 to just over $4,400 this past June, the economists said. Land values continued to increase even more dramatically during the last half of 2010.

"These higher prices aren't for development purposes," Boehlje said. "Many of the land sales in the Midwest are to farmers rather than outside investors, so it's farmers bidding against farmers. Not only is land demand strong but also supply is low as few families are willing to sell. Strong demand with limited supply makes farmland a hot commodity, both for its asset value and the income it can generate.

"In addition, low interest rates are making farmland attractive, and farmland is seen as a hedge against inflation. Farmland and real assets, whether they be land or commodities, are perceived by many to have more inflation hedge potential than financial assets."

Higher crop prices play a major role in farmland values as they increase returns, Hurt said. Global demand for grain is growing, brought on by higher world incomes and the increased use of crops for biofuels.

Two huge growth markets have been corn for ethanol and soybean exports to China, Hurt said. In 2005 those two markets required 16 million acres of production. By 2010 it took 41 million acres of the two crops to meet those market demands, he said.

"That's a startling 25 million-acre increase in the demand for land," Hurt said. "It represents about 10 percent of the U.S. crop base planted to major crops. That says we've had a very large increase in demand for land and is thus one of the primary contributors to surging land values on the demand side."

Crop prices also are getting an indirect boost from Federal Reserve monetary policy. Hurt said the second round of the Fed's buying of Treasury securities through so-called "quantitative easing" is conducive to weakening the U.S. dollar and creating inflation.

"The act of creating more money tends to depress the value of the dollar. That generally results in stronger commodity prices, which would then push up returns to farmland and be an added stimulant to land values," he said.

High crop returns also affect the rental rates landowners charge farmers to use their land.

"Cash rents are higher as a result of the greater returns to the land on which crops are grown, but farmland prices have been rising more rapidly than cash rents in recent years," Gloy said.

A 2010 Indiana farmland value survey conducted by Purdue indicated that average-quality Hoosier farmland was worth $4,419 per acre in mid-June. Cash rents on that land averaged $161 per acre, meaning buyers were willing to pay a price for land that was about 27 times the annual rent. By contrast, this "value-to-rent multiple" was 20 in 2000 and just 12 in 1986.

"The increased value-to-rent multiples suggest that both rising crop incomes and falling interest rates have been leading contributors to today's land values," Gloy said. "Future land values will largely be determined by the economic returns to farmland ownership, the level of interest rates and by expectations, including inflationary expectations, of both land buyers and sellers."

Source: http://www.purdue.edu/newsroom/general/2011/110107BoehljeFarmland.html