Farmland Value Trends in Compeer Financial Territory

It’s difficult to make general statements about farmland values that cover all of the Compeer Financial territory, but there are a few common elements we’ve identified through the  benchmark system we use to track land values over time. Appraising the same 36 farm operations on an annual basis provides a lot of data that can be leveraged to determine trends on a local and regional basis. These farms consist of a full range of agricultural properties distributed throughout the association territory. For consistency purposes, these farms are re-appraised as of July 1 annually.

Territory-wide, demand for farmland continues to be moderate in most areas, while the supply on the market is limited. Land values have fallen from the peak in 2013 for Illinois and Minnesota, and 2015 for Wisconsin while following commodity price trends. However, reductions in value have not been as severe as reductions in commodity prices with the end result being lower capitalization rates. There appears to be a dichotomy in the agricultural land markets with a segment having significant capital reserves and in the position to purchase land and a segment that is highly leveraged.

Northern/Western Illinois
Illinois is unique in that there is a well-developed and universally accepted soil survey system that breaks land down into quality classifications based on productivity indexes. While values and yields for each cropland type tend to vary by location, the relative productivity does not.

The following chart illustrates changes by cropland type for the northern and western Illinois benchmarks. While overall values were basically static at +0.5% there were some very significant individual benchmark changes.

 
Northern Illinois benchmarks were down an average of 3.3%. Of the six benchmarks in this region, five (all A and B quality) were down in a range of -8.2% to -3.7%. The highest valued benchmark in northern and western Illinois for 2018 had the biggest reduction in value; however, it should also be noted that it had not changed since 2015.

Western Illinois benchmarks were up an average of 2.9%. Of the ten agricultural benchmarks in the region, three were up in a range of 7.4% - 16.3% and two were down in a range of -3.4% - - 3.7% with the others unchanged or slightly up. Much of western Illinois had extremely strong yields in 2018, and we saw the return of institutional investors in the area, further pushing up prices. The average value of the three “Cropland A” benchmarks for the region is $12,500/acre.

In the 2013-2016 period we saw falling land values, but since 2016 we have seen little movement up or down in the Illinois markets.

 
Central/Southern Minnesota
Minnesota is divided into central and southern regions with two benchmarks in the central region and eight in the southern region. While we value each benchmark as improved and unimproved, my focus is on the land values, without considering the building improvements.

The chart below illustrates the changes for these benchmarks by region.

 
Both central Minnesota benchmarks were down from the 2018 update. Farmland in central Minnesota is much more variable than southern Minnesota and the value of the lower quality land has slipped further.  Areas directly west of the Twin Cities have not witnessed record production levels the last few years that other parts of the state benefited from.  The average values of these two benchmarks peaked at $8,029/acre in 2013.

The eight southern Minnesota benchmarks were basically unchanged at -0.1%. Six were unchanged, one was up 1.45 and one was down -2.6%. Land quality is better than central Minnesota in this area, and variable, but generally had strong 2018 corn and soybean yields. The average values of these benchmarks peaked at $8,302 in 2013.
 

 
Wisconsin
Wisconsin land values are not driven as much by corn as soybean prices as Illinois and Minnesota and show some slightly different trends. Land values peaked in 2015 and tend to be tied closer to milk prices. While the benchmarks are shown as dairy and bare land in the table below, they are not necessarily separate benchmarks. In Wisconsin we track values separately for five of the dairy benchmarks.

 
Five of the six dairy benchmarks have significantly more land value than improvement value and value changes in a range of -2.95 - +5.3%. These are general improved farms, some with mixed buildings that include dairy improvements and are not indicative of specialized dairy farms. The benchmark considered a specialized dairy shows a -7.4% change for the year and a -10.7% decrease over the past three years. While there is weakness in the dairy industry as a whole, most of the significant decreases in value has come from sales outside of Wisconsin. That is not to say that there are not farms transitioning out of dairy, because there are sales of operating dairy farms that are being converted to other uses. Wisconsin has a very strong dairy infrastructure and support structure, helping to hold the industry up.


Summary
While there continues to be significant economic stress in the agriculture industry overall land values continue toy remain stable. There is a significant amount of variability in valuation changes from 2018 based on local market factors. Overall, supply of land on the market is limited, but there are pockets of strong demand that have pushed prices upwards in some areas. A trend toward stronger institutional demand exists in some areas that was not present over the last few years. In some cases, I believe these institutions have decided to accept lower rate (capitalization rate) of returns for their investments than in previous years.

There continues to be a lot of uncertainty around 2019 due to tariffs, support packages and a lot of variability in crop conditions. All of the above, and more, are factors that could affect land values moving forward.

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