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Column: Farmland values: How high can they go?

WORTHINGTON -- At the end of each year for the last 15 years, a survey is conducted for farmland sales in 14 southwest Minnesota counties.

The survey reports bare farmland sales to non-related parties for the first six months each year. After the crash in farm land values from record high prices in the 1980s, farmland values continue to rise and are once again reaching all-time record levels.

Data collected in this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine counties.

The data from these counties indicated prices increased from an average of $2,262 in 2005 to $3,702 in 2008, or an increase of 64 percent. A large portion of this increase -- 30 percent of the 64 percent -- happened in 2008.

Farmland prices increased an average of 30 percent in the 14 counties, and from an overall average of $2,849 per acre in 2007 to an average of $3,702 in 2008.

So what is making land prices increase?

There are several factors that have an effect on land values. Farm income, grain prices, interest rates, return on other investments and 1031 exchanges are often mentioned as reasons for the increase.

Farm profits are up in 2008 to record levels according to USDA forecasts. There have been three consecutive years with record farm profits in the Southwest Minnesota Adult Farm Management program, and 2008 will probably continue this trend as record prices for corn and soybeans were recorded in 2008. This would add local demand for the land from farmers.

Interest rates are at historically low levels with the current national recession, and land rental income is comparable or larger than what an investor can earn from treasury bills or a certificate of deposit at financial institutions.

The bond market has provided a good return on investment as the rates have fallen. With interest rates at historically low levels, if they start to increase the bond return will fall and possibly turn negative.

The stock market, which had recovered from 9-11 lows only to experience a large sell off in 2008, generated negative returns.

Money continues to leave the stock market and flow into more cash-based products.

The 1031 exchange is for farmers or landowners who have land in an area of increased value due to location to city or development.Rather than pay taxes on a large gain from the sale of the land, they purchase like property or other farmland at a more reasonable price. This has the effect of increasing prices even in nonmetro locations, but this impact will be tempered by the national recession.

The reason for the increase in farmland sales prices is a combination of all of these factors. If you would like a copy of a twopage document on the trends in farmland sale prices, contact your local county Extension office at any of the counties listed above.

The report also includes the high and low sales that ranged from a high of $7,800 in Rock County to a low of $1,452 in Murray County.

The actual sales price as compared to the assessor's estimated market value for the 14 counties was 77.43 percent of the average sales price. The average crop equivalency rating was 69.

Thirteen counties experienced an increase in farmland values ranging from an increase of 8.8 percent in Martin County to 77.3 percent increase in Lyon County. Lyon had a decline of 4.2 percent in 2007.

Only one county experienced a decline in 2008 and that was Lincoln County, with a negative 2.4 percent change while having the largest increase in 2007 of 47.8 percent.

Land sold each year can vary by region, even by county, so values can fluctuate. For example, farmland could be sold one year closer to a larger city like Marshall and none sold the next year.

How high can farmland values go? Supply and demand will determine this.

The simple return on investment, which is determined by rental rates, will determine how competitive farm land is compared to other investments. This will determine a value for farm land.

If interest rates rise or farm rental rates fall, the value of land is sure to be affected in a negative way, and that will cause a decrease in land values. As long as these factors do not occur, the price of farmland will continue to climb.

There are indications that land values have started to decline 10 percent to 15 percent in the second half of 2008 as the stock market and grain price fell considerably.