ISU official cautious about land values (complete article from source)
Source: SiouxCityJournal.com, by Russ Oechslin
March 05, 2008
SPENCER, Iowa -- Iowa State University's Dr. Michael Duffy recalled a recent conversation with one appraiser, who described how he sets land prices under current market conditions.
"He said, 'I figure the value and then I add $1,000,' Duffy said during the recent Ag Outlook in Spencer, where he was a featured speaker.
Statewide, land values today average $3,908, compared to $2,147, the last peak, in 1981, Duffy said. In Clay County, where Spencer is the county seat, values are up 24.7 percent in the last year, he said.
As head of Iowa State's Beginning Farm Center, Duffy prepares the annual land values survey for the state. While auctions are the favored method for selling in today's environment, a September survey from Creighton University found that about half of Midwest bankers surveyed felt the land value growth was unsustainable.
Of concern, Duffy explained, is that land continues to change from one generation to the next. He expects that trend will accelerate as farm land ownership is in the hands of a rapidly aging population. About half of Iowa's farm land is owned by people over 65, he said.
"Eventually we all fall off the perch,' and the land gets divided up among the kids.
Out-of-state ownership is also raising land values, Duffy said, with about one in five acres owned by non-residents just six years ago.
"My guess is it will probably go to one in three, and maybe even as high as 40 percent before we see this kind of bubble move out.'
"Mostly we're still seeing equity financing. In early 2000 we had a lot of investor interest (with) 1,031 exchanges. The stock market was so poor. Once the ethanol boom hit, about 18 to 24 months ago, then it became a farmer-driven market.'
The percentage of farmers owning land had been slipping, but is now going back up, Duffy notes, as the nation is looking at record farm income, even with the fall-off of farm payments.
Comparing net farm income to expense, Duffy explained that in the 1950s it was in the 50-percent range and has now dropped down to the 25-percent range.
"We're spending more and more money just to make the same amount. That is especially significant to young, beginning farmers, because what they don’t have is a lot of capital.'
And with constantly rising costs, Duffy joked that when he does cost production estimates, "I'm going to start doing them in pencil.'
Are land values really high? Adjusted for inflation, Duffy explains that 1979 really saw land values at $5,500, compared to today's $3,900.
Citing the sentiment of ISU ag economist Gene Futrell, Duffy explained that "timing is everything in the success of a raindance.' Duffy showed comparisons of $1,000 invested in farm land and the stock market at different times.
The 1950 investment would work out about even, Duffy showed, with a value of about $450,000 in each place today.
A $1,000 investment 20 years later would be worth just under $50,000 in stocks, today, compared to about $80,000 in land, he said
Investing $1,000 in 1980 would net about $33,000 on the stock market, and only about $10,000 in land value. "Obviously, 1980 was the year before the peak.'
But a similar investment at the turn of the century would see land values out-pacing the stock market by about 2:1, with a value of just $1,500 in the stock market, compared to $3,000 in Iowa land.
The bio-economy is a major factor in land values in the years ahead, Duffy says. Biolfuel mandates will be important as will the length of time corn-based ethanol will be the standard. Switch grass, stover and corn cobs "still use Iowa land base,' he noted.
"And as long as it does, then our income is going to be high. But what happens if it goes to kelp? Or what happens if it goes to algae? Or what happens if it goes to hydrogen or something we can't even imagine?
"Five years ago if I had come here and said $5 corn and $14 beans, you know you'd have all gotten a good laugh out of it. And that would have been it.
"We're in a whole new world. Everything is changing. All of these relationships that we used to look at and work with have been altered. I think it is important for us to be thinking about this as we look ahead.'
The impact of rising food costs is creating negative public sentiment, he added, and is a consideration with many other factors, as well.
Nov. 1 value per acre 2006 2007 % increase
Buena Vista $ 3,914 4,846 23.8
Cherokee 3,531 4,466 26.4
Clay 3,612 4,506 24.7
Crawford 3,254 4,013 23.3
Dickinson 3,404 4,210 23.6
Emmet 3,721 4,515 21.3
Harrison 3,093 3,773 21.9
Ida 3,668 4,426 20.6
Lyon 3,447 4,458 29.3
Monona 2,838 3,452 21.6
O’Brien 4,255 5,306 24.7
Osceola 3,640 4,687 28.7
Palo Alto 3,525 4,392 24.5
Plymouth 3,830 4,802 25.3
Pocahontas 3,830 4,663 21.7
Sac 3,824 4,745 24.0
Sioux 4,063 5,204 28.0
Woodbury 3,014 3,570 18.4
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