beef cattle grazing in pasture, mountains behind
BACK TO EQUILIBRIUM: A bubble in land prices in some parts of the country is slowly contracting. This impacts values in the West as well. Rental rates should adjust as values slide.

A look at Western land values

A range of factors impact the price of the ground you run, but how does the West do when looking across the country?

The net farm income in the United States hit an all-time high in 2013, and brought land prices along with it. In the last few years, land values sank across the nation in correlation with crop and livestock prices. The Midwest trended downward the most at 8% to 12%, while the Northern Great Plains only 2% to 5%.

Even with this price decrease, the long view of the past 15 years shows real estate values increased nearly 7% a year. Current steady crop prices bring a prediction that ag land values will soon stabilize.

“Crop mixes really dictate what land values look like,” explains Anton Bekkerman, Montana State University associate professor in the Department of Agricultural Economics and Economics. “Where corn and soybeans are grown, we saw huge price increases in land prices from 2010 to 2012. In Montana, Wyoming, and other states without the capability to grow corn and soybean crops, land values didn’t move much.

“It’s highly unexpected to see a run-up of crop prices in the near future. We'll likely keep seeing $4-to-$5 wheat prices, and $3-to-$4 corn prices. I think as the output and market stabilize, land values will stabilize as well. We were in a bubble, especially in the Midwest, and now we're adjusting back to equilibrium.”

Impact of interest rates
In addition to crop prices, another factor in the previous high land prices was low interest rates. Many farmers and ranchers purchased more land to grow their operations, and appreciation rates attracted investors.

“Since 2016, the Federal Reserve finally started to push interest rates up,” Bekkerman says. “If we see continued increases and signaling by the Federal Reserve that interest rates are going to increase, I think that will keep pushing down land values. If interest rates stabilize, we'll see a fairly stable land market as well.

The U.S. cropland value remained unchanged at $4,090 per acre from the previous year. In the Southern Plains, the average cropland value increased 6% from the previous year. However, in the Northern Plains, cropland values decreased by 4.4%.

“High interest rates lowers the demand for ag land, because buyers are reluctant to take out loans to purchase it. There's always been this inverse relationship between land values and interest rates.”

There was a similar shift in crop prices, land value and loan interest rates in the 1980s. The ag economy didn’t crash this time, as farmers and ranchers are more financially stable than 30-plus years ago. Also, financial lending institutions now often restructure loans rather than have the borrowers default.

Rental rates respond slowly
Rental rates depend on the demand for the crop produced on that land. Ben Eborn, an Extension agriculture economist and professor at the University of Idaho, says the previous high crop prices in Idaho caused bidding wars for leased ground.

“Everybody wanted every piece of ground they could possibly rent and they'd pay almost anything to get it,” Eborn says. “But last year’s grain and potato prices weren’t very good. For the first time that I can remember, farmers returned their leased ground back to landlords.”

Rent also follows land value trends, but tends to slowly respond to market fluctuations. “Land prices move faster because it's more of a fluid market,” Bekkerman observes. “Rental rates are stickier because they're related to multiyear contracts and commitments between the landowner and lessee.

“As landowners update their information about how much land is worth, given land market dynamics, we're going to see those rental rates adjust. If we have truly come to a more stabilized land value market, then we should see rental rates catch up to land prices and a stabilization in rates,” he says.

The U.S. farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,080 per acre for 2017, up $70 per acre (2.3%) from 2016 values. Regional changes in the average value of farm real estate ranged from a 8.7% increase in the Pacific region to a1.8% decrease in the Northern Plains. The highest farm real estate values were in the Corn Belt region, at $6,260 per acre. The Mountain region had the lowest farm real estate value, at $1,130 per acre.

But research shows that the longer the tenure of a lessee, the more likely the rental rate that person pays is less than true market value. The hypothesis is that the social interaction and trust built between the landowner and lessee prevent the owner from increasing the rental rate to current market values.

“Say someone has rented land from me for 20 years,” Bekkerman says. “There's a cost for me to find another renter if you decide to not take the new, higher-priced contract. So I'm going to keep rental rates lower. The rental market is based on a combination of social behavioral dynamics and pure underlying economic forces.”

See Part 2 on Tuesday, with a look at external factors that impact land values.

Hemken writes from Lander, Wyo.

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