Land buyers like what they see, feel
Non-farm investors playing larger role
By Janet Kubat Willette
Farmland buyers are motivated by many things.
For some, owning farmland is part of their heritage. For others, in the wake of Enron it seems less risky because it's there no manner what CEOs do.
"I don't know any other way to say it …; yes, people want to own dirt," said Gary Hachfeld, regional Extension educator specializing in ag business management based in Nicollet County.
"It's something you can hold in your hand," said Iowa State University Extension economist Mike Duffy. "It's something they don't make anymore …; you can walk on it …; it's a feeling of security.''
Whatever the motivation, farmland is selling and increasingly non-farm investors are bidders.
In 2001, an average of 67 percent of Iowa farmland sold was bought by existing farmers, according to a recent Iowa state land value survey. Non-farm investors bought an average of 27 percent statewide.
Ten years ago, 75 percent to 80 percent of land sales would have been to existing farmers, Duffy said.
In some districts, non-farm investors purchased nearly a third or more of the farmland sold. In the south central reporting district, 41 percent was purchased by non-farm investors. In the southwestern region, the percentage was almost 32 percent.
In Minnesota, most land is purchased by farmers to expand their businesses, said Bill Lazarus, University of Minnesota Extension economist. But hunting and recreational land purchases are also on the rise.
Long term, agricultural land has tended to be a good investment.
Agricultural land prices increased for more than 50 years prior to the 1980s financial crisis. From 1981 to 1987, farmland prices dropped by more than 50 percent, said Erlin Weness, Extension education in farm management based in Nobles County.
Timing is critical, Weness said. Land purchased at today's prices may prove difficult to cash flow.
Farmers can't cash flow $2,600 an acre land -- Nicollet County farmland is selling for $2,200 to $2,600 per acre -- even with government payments, Hachfeld said. Instead they spread the debt across all their acres, lowering the load.
Most agricultural land sales in the county are to other farmers, but non-farm businessmen are also investing in land.
"Obviously, the reason for that is people feel it's a good investment," Hachfeld said.
Agricultural land generally averages a 4 percent annual return, which is better than money markets or certificates of deposit.
Many farmers purchase land as a retirement plan, Weness said. He knows of many retired farmers who draw a significant amount of income from their land.
Many retired farmers do own land, Duffy said. In a 1997 survey conducted in Iowa, 37 percent of the state's land was owned by people age 65 or older.
But owning farmland is also costly. Taxes must be paid and the land must be cared for every year.
In Iowa, taxes are determined by a complicated formula that takes into account how well the land is producing and how much income is generated. In Minnesota, property taxes range from $8 to $20 per acre or more, Weness said, depending on location and land quality.
Farmland returns also vary depending on land quality, with some people purchasing land for other uses, such as hunting and other forms of recreation.
The extent to which government payments are stabilizing land rents worries some.
"We're assuming these payments are going to last," Duffy said. "The big concern I have is how much is due to the government rather than the market."
For the 1990s, the average farmer received 55 percent of his income from the federal government, Duffy said. He estimates one-fourth to one-third of land value is due to federal subsidies.
In many cases, that prices beginning farmers out of the market.
It's unlikely payments will be eliminated, Duffy said, but the impact of payments lowered in the face of an expensive war on terrorism or a public tiring of expensive farm programs could be dramatic.