Farmland prices reach historic highs in Upper Midwest

Eighty-nine acres of farmland sold for $6,950 per acre in Brown County, 74 acres sold for $7,145 per acre in Martin County and 80 acres sold for $7,563 per acre in Sibley County — all in the span of a week in February in southwest Minnesota.

Farmland values leveled off after 2014, but acreage is still selling at historically high prices in the Upper Midwest. And that's a good thing for Minnesota farmers, who endured their least profitable year in three decades in 2018 thanks to low grain, meat and milk prices, a trade war with China and bad weather.

Despite all the headwinds in agriculture, average land values in Minnesota rose 4.5 percent in 2018, according to data compiled at the University of Minnesota. Anecdotally, land prices haven't dropped this year.

"The current land market defies economic logic a little bit," said Wendong Zhang, an economist who runs the Iowa State University Farmland Value Survey.

The market for land has so far been insulated from broader uncertainty in the farm economy because much of the richest farmland in the Midwest is already paid for, and farmers still have cash lying around from the boom years of the early 2010s.

When land does become available, intense bidding wars result between neighbors who have often had their eyes on the acreage for years and know it may not be available again in their lifetime. Some may need it for reasons beyond growing crops, such as to spread manure from cattle or hog barns.

"There's people in rural communities who have really strong balance sheets and have the capability of buying land," said Mark Greenwood, a Mankato-based executive at Compeer Financial, one of the nation's largest farm credit associations. "It seems that if there's land close by that they've always kind of wanted to farm and it comes up for sale, then that value holds up real well. That just goes to show you that there's still money in the countryside."

The resilience of land prices is staving off a deeper financial crisis for farmers as the trade war drags on, commodity prices stay low and another wet spring threatens to delay planting.

The average farm's debt-to-asset ratio increased slightly to 36 percent in 2018, still a healthy level, according to an otherwise grim report on farm finances from the University of Minnesota last week. That's due to high land values, and it enables farmers to borrow money for planting and keeps the operations of those who aren't earning much money financially sound.

"They still have very strong balance sheets due to their land values being strong," Greenwood said. "That is helping them, absolutely."

Larry Aanenson, a real estate broker in Fulda in southwest Minnesota, said farmers are reluctant to sell because they still think their land might fetch the record prices that were reached six years ago. They also tend to believe that earning reliable rent or farming the land themselves is preferable to selling and either earning low interest in the bank or investing in a volatile stock market.

"The sales of land has slowed down substantially," Aanenson said.

Even though some farmers are struggling, Aanenson said, reports of their financial doom are greatly exaggerated.

"You got to remember, this isn't a one-year deal," he said. "Sometimes people make it worse than it really is."

The key reason prices are staying high is that supply is limited, said Zhang, the Iowa State economist. In Iowa, of a possible 30 million acres of farmland, only 200,000 acres changed hands in 2018, or just over half of 1 percent.

"There's not a lot of land to buy," he said.

More than 80 percent of farmland is already paid for in Iowa, Zhang said. Greenwood, the Compeer Financial executive, said the share of farmland in Minnesota that's owned debt-free "has to be" pretty high too.

Local competition for land is another factor keeping prices up. Farmers who raise livestock need nearby land to spread manure, which saves them money on fertilizer and manure transportation. For example, in 2012, two farmers in northwest Iowa bid up neighboring land to $21,900 per acre.

"My understanding was it was two 70-year-old farmers that got to bidding on it," said Terry Kestner, a vice president and chief appraiser for Rabo AgriFinance LLC, a national ag lending firm. "They were adjoining landowners on each side that needed space to spread manure. At what it costs to pump manure? Yeah, you can kind of see it. And when you're getting the fertilizer, a lot of times the fertilizer value out of a hog building can darn near make the farm payments."

While the heady days of $20,000-an-acre land sales are long gone, the same local dynamic still exists, especially in livestock-intensive parts of the Midwest.

"That farm close by, you may get one or two chances in a lifetime to buy," said Kestner, who's based in Cedar Falls, Iowa. "When it comes up, you better buy it."

Zhang, at Iowa State, said growing farm financial stress is starting to force lenders to encourage farmers to sell land. As that happens more, supply may increase and prices may be affected. Another reason more land could come on the market is the age of farmers. In Iowa, for instance, more than 60 percent of land is owned by a farmer older than 65.

"The farmland market in general is holding up remarkably well mostly because of limited land supply," Zhang said. "But I expect land values to decline again because we are expecting higher interest rates and the farm income is not significantly bouncing back."

Adam Belz • 612-673-4405 Twitter: @adambelz