Up, up and away: High commodity prices drive increases in farmland values, rents
The Federal Reserve Bank of Chicago reported earlier this year that Wisconsin farmland values rose 18 percent in 2011, mostly driven by demand for acreage to grow corn and soybeans.
In the five-state region that includes Wisconsin, prices were up 22 percent, the biggest increase since 1976.
"The year 2011 may go down in the annals of U.S. agriculture as a once-in-a-generation phenomenon," the bank said in its February "Ag Letter."
In Rock County, land prices in 2011 were up 23 percent, according to a Gazette review of real estate data provided by the Wisconsin Department of Revenue.
Last year, 4,125 acres of Rock County farmland sold for an average price of $6,209 per acre.
David Oppedahl, a business economist for the Chicago Fed, said significant increases in ag prices have hiked farmland values.
Across the district in 2011, corn prices were up 57 percent, soybean prices increased 26 percent and wheat prices jumped 45 percent.
The price increases stretched into the livestock and dairy markets, he said, noting that milk, hog and beef cattle prices were up 23 percent, 21 percent and 21 percent, respectively.
"Commodity prices have been good, and the demand has been strong," said Jim Stute, UW Extension crops and soils agent for Rock County. "We had a fundamental change in commodity markets in about 2008, and prices have generally doubled.
"That's increased land values and rental rates."
In years' past, urban sprawl fueled increases in farmland prices, but the recent recession and downturns in the housing market have all but eliminated that as a reason for the surging values.
Some high-priced sales inflated the county's overall average.
One in Johnstown Township involved 76 acres at an average price per acre of $12,200.
Four other sales topped the $10,000-per-acre mark, including the sale of 160 acres in Bradford Township that is now the home of Rock Prairie Dairy, which will become the largest dairy operation in the county.
Rent rather than own
Farmers that rent the land they work have not been immune to the price increases.
The rent the pay increased significantly in recent years.
Stute said the state listed the cost to rent an acre of Rock County farmland in 2011 at $149, which is an average that includes good and poor soils.
Farmers, he's heard, are paying much more than that—in some cases double.
"Rental rates are the best kept secret in Rock County," Stute said. "I've approached my best cooperators and asked them that if I did a survey on rental rates, would they answer it and would they answer it honestly?
"The answer to both was no."
As land prices increase and commodity prices rise, traditional farmers aren't the only ones opening their checkbooks.
Outside investors are buying local land that they can rent at the higher prices to local farmers.
"The land rents are increasing for the same reasons that sales prices are going up: commodity prices are attractive," said Matt Larse, a loan officer at Badgerland Financial in Janesville.
"We are financing people from all over the United States on land in Rock County. Commodity prices are strong, and the stock market is unstable, and outside investors look at it is a solid investment."
Larse said many investors make a down payment of 50 percent on the land and then charge $200 or $300 per acre on a rental contract.
"That pays the mortgage, and they still have the land as an asset," he said.
Most local land sales, he said, are not to small operations looking to add another 40 or 60 acres. Instead, the sales are either to investors or to full production farmers who want a minimum of 120 acres to expand their operation as efficiently as possible.
In its May "Ag Letter," the Chicago Fed noted that farmers are buying more of the land in the district than outside investors.
Stute said he believes that trend holds in Rock County, as well.
Will it continue?
Commodity prices are still strong, but they may be leveling off or even slipping, Stute said, adding that costs for fertilizer, seed and fuel have continued to increase.
That's cut profit margins.
"Costs are up dramatically," Stute said. "It's a high-cost year, and if commodity prices fall, we could have all sorts of problems."
The soaring land values have been noticed in the ag lending community. Some lenders fear the bubble could burst—as it did in the 1980s—if farmers struggle with lower commodity prices, rising costs and too much debt.
Larse said land values are strong and increasing.
Whether it will continue, he said, is the $1 million question.
"Some economists say it will stabilize and growth will slow; others say that's not the case," he said.
So far in 2012
Oppedahl said agricultural land values continued their rapid rise at the start of this year.
Across the five-state district, values were up 19 percent, including a 13 percent increase in Wisconsin.
County-level sales, however, are yet to be certified.
"Already in 2012, Rock County has had three or four sales with averages above $12,000 per acre," Larse said.
One of those sales involved the city of Janesville's purchase of 84 acres in Rock Township for $18,000 per acre. Eventually, SHINE Medical Technologies will use a portion of the land for production of medical isotopes.
Larse said such sales tend to skew average prices higher, while family transactions for land sold below market value often lower average prices.
"It certainly works both ways," he said.
Looking forward, Oppedahl said the trend toward higher farmland values could be easing.
One-third of the banks surveyed by the Chicago Fed expect farmland values to increase through the second quarter, while two-thirds expect prices to stabilize.