A number factors – both positive and negative – are at play in terms of land values and to what degree they might influence how much land comes on the market, says Randy Dickhut, senior VP of real estate operations for Farmers National Company, a landowner services and real estate firm based in the Midwest.
Dickhut lists 3 positives:
#1. A post-harvest bump. “The industry has experienced a post-harvest bump in land prices in most grain producing areas. With above average crop yields in most locations, farmer optimism has increased as has the bidding for quality crop land. The supply of land on the open market remains low while the number of buyers and demand is adequate for what is on the market at this time.”
#2. Continued low interest rates. That create as demand for land as a long-term investment for individuals and institutional funds, he says.
#3. Purchasing power. At least some farmers can still compete for good land or land, Dickhut contends. “We are also seeing a small increase in 1031 tax deferred exchange buyers as they move to trade into different land or to diversify out of other real estate holdings and into cropland,” he adds.
He also sees 4 negative factors:
#1. Lower income potential. Current farm economics are not conducive to strength in the land market. Low grain prices are keeping overall farm income levels depressed. That means that lower incomes are reducing the cash flow necessary to finance crop inputs, equipment needs and land payments, leaving less cash for land purchases.
“Individual and institutional investors are well aware of the lower grain prices and incomes,” says Dickhut. “The resulting reduction in the return on investment for land has kept some investors out of the land market during the past few years.”
#2. Hesitant moneymen Lenders are being more cautious in the amount of money they will lend for agricultural land purchases. This could dampen demand as farmers and ranchers are the predominant buyers of crop and grazing land, Dickhut pointed out.
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#4. Unintended or unexpected consequences. This could include negative outcomes for trade with long-term U.S. ag customers, unexpected consequences from tax laws and potential changes in the next Farm Bill.
“The next six months will determine the direction of land values,” Dickhut predicts. “Economic and financial factors will become more evident for producers and lenders. The factors and the outside influences will become better defined as we move through 2018.”