Three years ago I stated, “No one knows the future, but there is a good possibility that we have seen the last of the rising land-value reports for a while.”
This was a strong statement, considering it was made a few weeks after an Aug. 2, 2013, U.S. Department of Agriculture report confirmed what surveys by the North Dakota Department of Trust Lands and the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers had indicated: Cropland values increased about 40 per cent during 2012.
My prediction of peaking land values was one year too early. North Dakota cropland values increased, depending on the survey, between nine and 17 per cent during 2013. However, during 2014, two of the three surveys indicated a one per cent drop in cropland values, while the other survey had a four per cent increase. For 2015, all surveys indicated a decline in the average value of North Dakota cropland ranging from negative four per cent, to negative nine per cent.
A further decline in North Dakota cropland values will occur for the 2016 year. Will land values decline in 2017? Probably, although markets can change abruptly.
In 2015, North Dakota farm profit plummeted to its lowest level since 1998. The North Dakota marketing year average price of spring wheat dropped from US$8.19 per bushel in 2012 to US$4.60 for 2015. Barring an unforeseen turnaround, it will be lower yet for the 2016 marketing year.
The percentage drop in corn prices has been greater than spring wheat. Relative to spring wheat and corn, soybean prices have declined the least, about 40 per cent from the marketing years of 2012 to 2015.
Out of necessity, farmers and their lenders are much more cautious in the land market. Sellers have had to temper their expectations, which were forged by a fourfold increase in cropland values since 2004.
The average working capital of farms enrolled in the North Dakota Farm Business Management Education program has declined by more than $250,000 since 2012, and the 2015 income was not sufficient to cover term-debt principal and interest payments on more than one-half of the farms.
In 2016, North Dakota net farm income will be low, similar to 2015. There are some positives: stronger soybean prices, greater government payments and lower costs. However, due to losses in spring wheat and corn, only a modest increase in net farm income seems possible.
The closest historic comparison is the 1973 to 1981 bull land market and its aftermath. Current cropland values, after adjusting for inflation, are still 20 per cent higher than the high in 1979. After the nominal price peaked in 1981, cropland values declined 40 per cent before bottoming out in the 1987-88 period.
As long as interest rates stay low, it is unlikely that land values will collapse to the degree that occurred from 1981 to 1988. The question of if, when and how much interest rates will rise is highly debatable, but it is a risk cloud that hangs over the land market. Higher interest rates eat into farm profit and make it more difficult for producers to cash flow land purchases with debt capital.
Higher interest rates make certain fixed-return investments more competitive relative to land. Cropland profit per acre would have to increase and/or land values decline for land to remain attractive as an investment. Given current low commodity prices, cropland values would drop.
Andrew Swenson is a professor with NDSU’s department of agribusiness and applied economics.