Many factors contributing to rising farmland prices

Farmland typically used to grow corn and other crops has been rising in price for several years.

By Jennie Zeitler, Staff Writer
jennie.zeitler@ecm-inc.com

According to Regional Economist Toby Madden of the Minneapolis Federal Reserve Bank, the bank’s second-quarter agricultural credit conditions survey indicated that farmland prices were 7 percent higher for ranchland and 4.6 percent higher for non-irrigated land than a year earlier.

While an article by Jennifer Bjorhus in the Minneapolis Star Tribune July 5, placed responsibility for the rising farm real estate prices on the nation’s crop insurance program, a letter to the editor four days later by Minnesota Corn Growers Association President John Mages of Belgrade refutes that claim.

In his letter, Mages stated that “the primary engine behind increased land values is the continued climb in crop prices, which is driven by two major factors: supply and demand.”

While farmers have been expanding planted acres, weather has kept the lid on potential harvests, he said. On the other hand, demand is also expanding.

“Despite last year being one of the worst weather years in history, farmers were able to bounce back because more than 80 percent of them had purchased crop insurance — the best risk-management tool available — which pays only if a loss is incurred,” Mages wrote.

“Rising farmland prices are not because of crop insurance or farm programs,” said Darrell Larsen, Morrison County’s executive director for the United States Department of Agriculture (USDA) in Little Falls. “Crop insurance has never assured anybody of a profit.”

“There are several factors affecting why prices are strong now,” he said. “One of the greatest pressures has been for hunting and recreation land, which was some of the lower-priced land in the past. We also get a lot of pressure from farmers within 30 to 40 miles of growing cities like St. Cloud who want to sell their land for development, and then purchase farm land further out for higher prices.”

Larsen believes that people are paying more for land than productivity will justify because they view it as an investment and think that land prices will never go down.

“I’m afraid prices will go down,” Larsen said.

Craig Roerick, University of Minnesota (U of M) Extension Agent for Stearns, Morrison and Benton counties, thinks that it’s a little bit of everything pushing prices higher.

“There is the rising crop demand,” he said. “China’s hungry and they are willing to pay for the crops. There is also the increased use of ethanol as a clean energy alternative to using foreign oil. Corn prices are driven up, which gives farmers greater income and the ability to increase their acres with more cash available to purchase land.”

Agreeing that the growing farmland prices are pushed up by supply and demand, President and Chief Operating Officer of AgStar Paul DeBriyn said, “The high prices of corn and soybeans in our area especially are driven by the global demand for commodities. Those commodity prices generate a higher level of cash for farmers, which justifies making a higher level of investment. They think the land is a good investment.”

When asked to compare the present cropland real estate boom with the situation preceding the farm crisis of the 1980s, DeBriyn said, “There are substantial differences between now and the 1980s. Farmland today is being purchased with a substantial amount of cash down, so a lower percentage of the value is tied up in the loan. Farmers are putting up to 50 percent of their own money into the purchase of land.”

“But there are similar traits between the 1980s farm crisis and the current housing market crisis,” he said. “The main similarity is the high level of debt to value.”

Whatever current land prices are, Americans should be aware of the low percentage of their income that goes toward food.

“In the United States we have probably the safest, cheapest food in the world; less than 10 percent of our average annual income goes to feed ourselves,” said Mages. “In Europe, it’s close to 20 percent, and in some parts of the world 50 to 75 percent. Farm policies in this country give us a safe, plentiful food supply.”

“We need to realize that American agriculture provides a more affordable, safer and higher quality food supply,” said DeBriyn.

“Minnesota farmland prices, whether near the Twin Cities or in seemingly the most ‘rural’ of areas, have always been affected by factors other than agricultural,” said Steven Taff of the University of Minnesota Department of Applied Economics in an April 2012 report. “While more highly productive cropland will still sell for more than nearby less productive land, all lands are increasingly desired for other reasons: recreation, retirement, investment and development. This results in some parcels selling for far more than we might expect if we simply focused on their farm income potential.”

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