Farmland values do not appear to be in a 'speculative bubble'
MES, Iowa — Many people are concerned about a potential farmland bubble burst, or a replay of the 1920s economic depression or 1980s farm crisis, said Dr. Wendong Zhang, ISU assistant professor of economics who led this year's Iowa Land Value...
AMES, Iowa — Many people are concerned about a potential farmland bubble burst or a replay of the 1920s economic depression or 1980s farm crisis, said Wendong Zhang, ISU assistant professor of economics who led this year's Iowa Land Value Survey.
"There are legitimate reasons to be cautious, especially with the slowing Chinese economy and potential rise in interest rates," Zhang said. "However, Iowa farmland values do not appear to be in a speculative bubble that caused dramatic declines in the 1980s farmland values or the urban real estate market in the mid-2000s. In the 1970s, there wasn't steady growth in farm income before the sudden collapse of farmland values."
Farmers now have accumulated substantial income during the last decade due to high commodity prices, and current farmland values don't seem to diverge too much from the economic fundamentals, Zhang said.
"The downward pressures on farmland values likely will continue and play out next year and beyond, but it will more likely be a rational and modest correction as opposed to a sudden change," Zhang said.
The Iowa Land Value Survey also found:
•The majority of farmland sales, 76 percent, were to existing farmers. Investors represented 20 percent of the sales, of which individual investors capture 15 percent of land sales. New farmers represented 3 percent of the sales and other purchasers were 1 percent of sales.
•Sales to existing farmers by Crop Reporting Districts ranged from 82 percent in northwest and west central to 55 percent in south central.
•Sales to investors were highest in south central (30 percent). Northeast, northwest and southeast reported the lowest investor activity (11 percent). Central and east central reported a slightly higher percentage of land sales to institutional investors.
•With the help of the Iowa Chapter of American Society of Farm Managers and Rural Appraisers and Iowa Bankers Association, 123 agricultural professionals participated in the survey for the first time.
• Seventy-seven percent of respondents predicted land values will decline next year, and only 4 percent of respondents thought the land values in their territory would increase. In particular, 39 percent predicted values in their territory would decrease, but less than 5 percent; while 32 percent predicted land values would decrease 5 percent to 10 percent. Only 6 percent predicted land values in their territory would decrease 10 percent or more.
• The predictions for land values five years from now reveal a more mixed picture: 32 percent and 17 percent of respondents predicted land values would go up or stay the same, respectively, while 19 percent and 18 percent of respondents projected land values would decrease 5 percent to 10 percent, or decrease more than 10 percent five years from now, respectively.
• The percent of respondents who reported fewer sales is the second highest recorded to date at 60 percent, which is the same percentage as in 2014. Additionally, 76 percent of all land purchases were to existing farmers and 23 percent to investors or non-individual entities.