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Column: Farmland values increase slightly in 2009

WORTHINGTON -- At the end of each year for the last 16 years, a survey has been conducted for farmland sales in 14 southwest Minnesota counties. The survey reports bare farmland sales to nonrelated parties for the first six months of each year.

After the crash in farmland 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. This year, the increase across the 14 counties was only 0.8 percent.

Data from these counties indicated prices increased from an average of $3,702 in 2008 to $3,733 in 2009, or an increase of 0.8 percent. This increase is significantly smaller than last year's 30 percent increase, when farmland prices increased in the 14 counties from an overall average of $2,849 per acre in 2007 to an average of $3,702 in 2008.

There was a lot of variability in the numbers from 2008 to 2009. The largest increase was in Lac qui Parle County, with an increase of 26.8 percent, while Cottonwood County experienced a decline of 36.7 percent.

Four of the counties experienced declines in farmland values. The two counties with the largest declines had the largest percentage increases from 2007 to 2008.

Rock County had the highest average sale price of $5,221 per acre and Lyon the lowest at $2,908 per acre.

The average Crop Equivalency Rate (CER) for the 14 counties was 68, with the highest price per CER in Chippewa County at $60.49 and the lowest in Cottonwood County at $44.41 per CER. The assessed values also became closer to sale values.

Historically, the assessed value would be 75 to 80 percent of the sales value. This year, the average for the 14 counties increased to 94.78 percent, while three counties experienced average sales prices that were less than the average assessed values.

Each year, sales can vary within a county and be closer to a larger city, which would have an effect on these average values from year to year.

So what is making land price increases slow down?

For the last eight years there have been large percentage increases -- from 8.91 percent in 2001 to 30 percent in 2008 -- while before this period an increase of 1 to 2 percent would have been more normal.

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 continued to be good in 2009, although down slightly from good levels the year before. There were three consecutive years with record farm profits in the Southwest Minnesota Adult Farm Management program from 2005 through 2007. In 2008, profits were good, but not at record levels and 2009 will probably continue this trend of good farm profits with good corn and soybeans yields.

Many livestock producers experienced a tough year in 2009 -- many with losses instead of profits, with poor prices for their commodities and high feed costs.

If the average farmer is profitable, this would add local demand for the land from farmers. Interest rates continue at historically low levels and land rental income is comparable or larger than what an investor can earn from treasury bills, bonds or a certificate of deposit at financial institutions.

The stock market rebounded significantly in 2009. The 1031 exchange is for farmers or landowners who have land in an area of increased value due to location to city or development and, rather than pay taxes on large gains from the sale of land, purchase like property or other farmland at a more reasonable price elsewhere. The aftershock of the recession and the real estate market would slow this impact in 2009.

The reason for the increase in farm land sales prices is a combination of all of these factors.

If you would like a copy of a two-page document on the trends in farmland sale prices, contact your local county extension office at any of the counties listed above.

How high can farm land values go?

Supply and demand will determine this. The simple return on investment, which is determined by rental rates will determine how competitive farmland is compared to other investments, and this will determine a value for farmland.

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. But as long as these factors do not occur, the price of farmland will continue to climb.

The slight increase in 2009 may be indication that land values have started to return to the more historical pattern of a 1-2 percent annual increase, but a decline could also be possible if grain price fall or the market adjusts after the large increases experienced since 2001.