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Farmland Boom Provides Boost to Slumping U.S. Midwest Real Estate Market

The bidders drove over snow- and ice-covered highways for a chance to own one of the most lucrative properties in the U.S. Midwest: 120 acres of farmland in Greene County, Iowa.

The winner of last month’s auction at St. Joseph’s Parish Center in Jefferson offered $8,200 an acre -- almost $1 million -- for the plot in Scranton Township. That’s 44 percent higher than the $5,701 per-acre estimate for average values in the county as of Nov. 1, according to Iowa State University data.

“It’s reflective of what we’re seeing,” Mike Duffy, an Iowa State economist in Ames, said of the auction outcome. “There’s just not a lot of ground offered for sale.”

Farmers and investors across the Midwest are bidding up cropland at auctions like the one in Jefferson as commodity prices surge. Farmland values in the central U.S. increased the most in at least two years in the fourth quarter, the Federal Reserve Bank of Kansas City said yesterday. The gains are a bright spot in a region where manufacturing job losses have driven down prices of homes and commercial property.

Prices may continue to climb even after the rise prompted Federal Deposit Insurance Corp. Chairman Sheila Bair to warn in October that a bubble may be forming. Values in Iowa, the largest corn- and soybean-growing state, may jump another 10 percent this year if commodities stay close to current levels, Duffy said in a telephone interview. They climbed 16 percent in 2010, according to an Iowa State survey.

“In the next year to two years, I don’t see a lot right now to indicate that it’s going to take a nosedive,” said Duffy, who conducts the annual Iowa land survey. “What people have to remember is farmland is primarily bought by farmers and they buy it for the long term.”

Demand for Corn

Corn futures rose 52 percent last year on the Chicago Board of Trade, the most since 2006. Global demand grew as inventories fell and warm, dry weather threatened output in Brazil and Argentina, the biggest corn exporters after the U.S. Soybeans rallied 34 percent in 2010, the most in three years, after record Chinese demand for the oilseed. Both commodities are trading close to their highest levels since 2008.

Corn may surge to a record in the first half of 2011, Agrocorp International Pte. said yesterday. The firm joined Rabobank International and Blackstone Group LP’s Byron Wien in forecasting new highs for the grain as demand increases and global stockpiles decline.

John Harder, 64, who owns 4,000 acres and lives in Cedar Rapids, Iowa, is optimistic that land values will climb if commodities extend gains and interest rates stay low.

Bullish Farmers

“I’m bullish because I’m a farmer,” he said in a telephone interview. “I’d buy another farm or two tomorrow if I could buy it right.”

Net farm income may increase 20 percent to $94.7 billion in 2011 from $79 billion in 2010, according to a U.S. Department of Agriculture forecast Feb. 14. The 2011 estimate is the second- highest in 35 years when adjusted for inflation, the agency said.

For investors in Corn Belt farmland, the return on land, which includes appreciation and income from renting to farmers, was 14 percent in 2010, according to the National Council of Real Estate Investment Fiduciaries.

The agricultural economy is doing so well that farmers making good profits have no incentive to sell their land, said Jim McCandless, the leader of UBS AgriVest LLC, based in Hartford, Connecticut, which has 161,516 acres of agricultural property under management valued at $551.6 million.

Limited Supply

“Prices continue to increase due in part to the limited supply,” said Randall Pope, chief executive officer of Champaign, Illinois-based 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.”

Prices jumped 14.8 percent for irrigated cropland in parts of seven states in the fourth quarter from a year earlier, and gained 12.9 percent for non-irrigated land, the Federal Reserve Bank of Kansas City said yesterday in a report on its website.

The bank’s region includes all or parts of Kansas, Colorado, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri. A majority of rural bankers surveyed said land values will climb in the next few months.

Midwest Housing

It’s a different story in large cities in the upper Midwest, where job losses have cut demand for homes and pushed prices down. While the median price for Midwest existing homes rose 3.3 percent in December 2010 from a year earlier, in the region that includes Chicago, Detroit and Minneapolis, it’s 22 percent below the peak in 2005, according to data from the National Association of Realtors.

The Midwest had 10.1 months of supply of single-family homes on the market in December, the second-highest among the four U.S. regions tracked by the Chicago-based Realtors group. Supply in the eight months to nine months range is consistent with stable home prices, the group has said.

Commercial real estate in the Midwest also is lagging behind a recovery. Prices in the region advanced 1.9 percent in the fourth quarter, trailing gains in the East, South and West, according to an index compiled by NCREIF.

The farmland rally’s endurance depends on prices for commodities and how much farmers can get from selling what they grow, said Jeff Conrad, president of Hancock Agricultural Investment Group in Boston. His company, part of Manulife Financial Corp., manages $1.5 billion of farm real estate, according to its website.

Possible Trouble

Jim Riesberg, 55, a farmer from Carroll County, Iowa, is cautious about what may lie ahead.

“Land’s strong,” he said after the Jefferson auction. “If we ever see grains take a dive, we’re in trouble.” He declined to say whether he placed a bid.

The FDIC’s Bair, speaking in October to the Risk Management Association in Baltimore, said “positive fundamentals” that are fueling the farmland boom could change. She warned that a price collapse similar to one in the 1980s could have a “severe adverse impact” on the nation’s almost 1,600 farm banks.

“While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring,” she said in the Oct. 18 speech.

1970s Boom

Demand for farmland surged in the 1970s and early 1980s as U.S. grain exports increased. Rising grain prices prompted farmers to borrow money to buy more land and when interest rates rose, farmers couldn’t cover the debt. The average price for Iowa farmland fell 63 percent from the peak in 1981 to the trough in 1986, according to Iowa State data.

Today’s farmers aren’t carrying as much debt as those in the 1980s, Duffy of Iowa State said.

Farm real estate interest rates in the third quarter -- 5.81 percent in Iowa and parts of four other states -- were the lowest since the Federal Reserve Bank of Chicago began keeping data in 1974. Lenders typically require a 35 percent down payment, said Troy Louwagie, a land consultant with Hertz Real Estate Services Inc. in Mount Vernon, Iowa.

“A large percentage of this land is being bought with cash,” Louwagie said, as profits get invested in more acreage.

The winner of the Jefferson auction, John Paul Fiedler, had an extra incentive to make his purchase. His great-grandfather had bought the land almost a century ago.

“It’s always been in the family,” said Fiedler, 29. He plans to rotate crops of corn and soybeans on the land, which he purchased with his sister from the estate of a relative.

Along with fluctuating land values, farmers have to adapt to changing energy costs and commodity prices, Fiedler said.

“There’s always some sort of wondering what’s going to happen,” he said.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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