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How high will they go?

LAND VALUES: How High Will They Go?

Land prices are at historic highs across the region, driven by strong commodities, high crop yields and historically low interest rates. But how long this upward trend will continue and its full impact has yet to be determined.

"We've had a perfect storm of factors driving land values," says Andrew Swenson, extension farm management specialist at North Dakota State University in Fargo. "These include several years of strong crop production, increases in the farmers' ability to pay for land, low interest rates, positive outlooks and a favorable tax climate."

This is reflected in similar land price trends across North Dakota, South Dakota and Minnesota, he notes. The previous peak in land prices in North Dakota was in 1981 and prices then dropped 40 percent over the mid- to late-1980s, finally bottoming out in 1987-1988.

"There was then a gradual rise from 1988 to 2003 and then prices picked up," Swenson says. "Since that time, the rise has been fairly rapid in North Dakota and across the region."

During 2012, land prices in North Dakota rose over 40 percent and in 2011 and 2010, prices rose nearly 20 percent each year. "We've had strong profits in crop agriculture since 2007," Swenson says, noting this is the result of historically high crop prices mixed with strong yields. "This has increased both the profitability of producers and their ability to purchase land."

The most expensive land in North Dakota is found in the Red River Valley, where rich soils produce bountiful crops. "Part of this equation is the price of land is being driven by the earnings of the land," says Alan Butts, realtor with Pifers Auction and Realty. "The highest prices we are seeing are in Walsh County, where sugar beet and potatoes are grown, but we are seeing strong values all over the state in all classes of land."

Rising Land Values in SD and Minn.

"We've seen a 25-year increase in land values statewide," says Larry Janssen, professor of agricultural economics at South Dakota State University in Brookings. "Some years have been modest increases, but in the last few years it has accelerated into overdrive."

Janssen says the state experienced a 33 percent increase in land prices in 2012 and a 26 percent increase in 2011. "The early 1970s was the last time we saw back-to-back years with price increases over 20 percent," he says.

The most expensive land in South Dakota is located in the eastern portion of the state, south of Brookings and along the Interstate 29 corridor. "We are seeing in some counties in this region an average cropland price of $8,300 per acre," Janssen says. "Five years ago, this same land was less than $3,800 per acre."

Minnesota is also experiencing an upward trend in prices for its fertile farmland. "The Morris area has the highest priced land sales overall in our primary trade area," says Ken Knudsen, senior vice president and chief credit officer at AgCountry Farm Credit Services, which provides credit and financial services to farmers and ranchers in eastern North Dakota and northwest and west central Minnesota. "Land outside of the Red River Valley has gone up more than land values in the valley, but all areas have seen significant increases and strong demand."

Managing Risk

Knudsen says rising land prices in the region have created primarily positive impacts. "Often high land prices are talked about as if it is a bad thing, but most people hope what they buy goes up in value," he says. "It may be a fear that we will see a return of what happened in the 1980s when land values fell 50 to 70 percent in our area. However, there are many different protections in place today to make those events unlikely. The sound crop insurance programs of today are probably the most important risk mitigators we have."

The many ways risk is reduced has contributed to strong land prices in the region, according to Knudsen. "Borrowers have locked in good interest rates for longer terms, up to 25 years; loans are more collateralized; there is room in cash rents and some crop inputs to help reduce operating costs; farmers have built up and maintained better working capital positions and overall financial strength; and lenders have maintained good credit disciplines and avoided excess leverage," he says.

"Ultimately, though, it is still old-fashioned supply and demand that determines land values. Lenders and borrowers just have to be smart to position themselves so they can be in a good position to handle whatever comes," he says.

Reaching the Land Price Pinnacle

North Dakota Agriculture Commissioner Doug Goehring says the price of both land and commodities in the region is reaching an apex. "We are starting to see a trend downward nationwide and we will begin to see this in North Dakota," he says. "Commodity prices are leveling off and land prices will follow the same trend."

He says the current land prices have also been driven by farmers' ability to purchase land. "The average farmer in North Dakota is between 57 and 58 years old, and has been in the business a long time. They have fixed assets and have paid off their debt with secure capital, and then they have purchased land close to them."

The decreased risk associated with land purchases has also encouraged the next generation of family farmers to get involved with land purchases. "Agriculture has become more appealing and has become more stable," Goehring says. "Farmers have the ability to help the next generation transition into the operation."

He notes the sustainability of current land prices is going to be dependent on the continued ability of landowners to balance the ratio of the land's market value to production value after purchasing land at current prices. "When you get a loan or buy land, the land has to produce to pay for itself," he says. "Right now the market value may be, for example, $1,000 per acre, but the productivity value may only be several hundred dollars per acre."

Goehring says those most impacted by the high land prices are young and beginning farmers who have established their operations in the last 10 years. "It is pretty volatile for them. These producers are establishing debt in good times and that is tricky."

"Most of the people buying land are adding to an existing land base," adds Butts. "Prices now make it hard for someone to break into land purchasing."

The Future of Land Prices

Swenson says land prices in North Dakota are not expected to drop in 2013. "This is a historic time and how long this can continue is questionable," he says. "The main drivers have been high crop prices and low interest rates."

The outlook for 2014 is uncertain, but Swenson says his best guess is crop prices will be lower and interest rates will be higher by late 2014 or 2015. As a result, land price levels will flatten out and possibly begin a decline.

"Are people paying more than what is economically sustainable at this time?" asks Butts in regards to what the future holds for land prices. "We'll have to see how things play out in the next few years."

How long the high land prices will continue is "the big unknown," Janssen adds. He believes prices in South Dakota will continue to rise for another year, but could begin to change in the next two years.

Knudsen says landowners' profits are going to play a key role in the future of land prices. "Profit margins determine the prices. As long as there are profits and the belief that profits will continue, land prices get bid up to those levels. Once the profit margins are low or negative, land values fall to match up with the margins."

But Janssen says the land prices are a reflection of the positive economy of the region.

"The impacts of land prices are not immediate, but over time, the land prices speak about the wealth of the region." PB

Kylie Blanchard

Contributing writer