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Booming Land Market Continues

 by DANIEL LOOKER   05/13/2011 @ 4:03pm Business Editor,

In the first quarter of 2011, land values in the U.S. heartland surged by 20% over a year earlier, according to a just-released survey of bankers in the Federal Reserve’s Tenth District ­– which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri.

The survey by the Federal Reserve Bank of Kansas City found the biggest land value increases in Nebraska and Kansas ­– at nearly 24% for nonirrigated cropland. Irrigated cropland was up 23.5% in Nebraska and 18.3% in Kansas. Ranchland also rose by about 11% across the district.

“The farm boom is continuing,” said Brian Briggeman, an economist based at the Bank’s Omaha office and co-author of the latest land value report. “Bankers are expecting it to continue.”

Briggeman said some of the 256 bankers responding to the survey have talked about the possibility that record high land prices may be “a bubble in the making” as one Missouri lender put it.  But for now, the consensus is that land prices will remain strong in the second quarter of 2011, with more than two-thirds expecting the rise in cropland values to level off.

“I don’t think any are expecting them to come down,” Briggeman told

Strong farm income is driving land sales made mostly to farmers. And the run up in values mirrors the boom of 2008, which also saw quarters when value increases topped 20%. Even after commodity prices crashed in late 2008 and through 2009, farmland prices in the district only fell  back in one quarter, and by less than 5%.

That wasn’t true of other regions of the country, however, Briggeman said.

“You saw a lot of stress on farmland values on the coasts,” he said. That’s where the collapse of the housing bubble hit the value of farmland that once had greater value for its development potential.

The latest Tenth District survey, which was conducted from March 15-31, also showed cash rental rates rising, especially for irrigated land. They showed a 17% increase from the year before. In Nebraska, even nonirrigated land saw an 18% jump in cash rents. Oklahoma, hard-hit by drought, saw cash rents for nonirrigated land go up only 1.6%.

Farmers buying land are making 20% cash down payments, on average, with another 30% of the cost covered by pledged equity. The remaining half is financed with new debt.

And much of the land being sold is going to farmers.

“Farmland is a great bellwether of the financial health of the agricultural industry,” Briggeman said.

Interest rates remained near historically low levels at the end of the first quarter of 2011, at just over 6.5% for operating loans and just under 6.5% for real estate loans.

Briggeman says land values could be affected if interest rates rise and investors see more attractive returns outside of farmland.  

Right now, one measure of the return on farmland, the capitalization rate (cash rent divided by the land’s value) is somewhat low, at about 5% in the District.

That’s far above the return on bank certificates of deposit, for example, but the historical average capitalization rate is 7% to 7.5%, Briggeman said.

Officials from the Kansas City Fed have said that if the capitalization rate goes back up to more normal levels, farm land values could fall as much as 30% over an extended period of time.

“While the outlook is bright, we can’t forget that agriculture is a very volatile today,” Briggeman said.

Here is the full KC Fed article, The Farm Boom Continues


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