Farmland values, rents riding economic roller coaster

KIMBERLY

Although owners of farmland in Wisconsin and adjacent states have fared well compared to other investment vehicles during recent decades, they're not exempt from the economic roller coaster that is being felt in land values at the moment.

That was one of the messages from University of Wisconsin-Madison professor of agricultural economics Bruce Jones to attendees at the semiannual farm management update sponsored by Extension Service offices in east central counties.

Drawing from the most recent reports by the Federal Reserve Banks in Chicago and St. Louis and long-term National Agricultural Statistics Service data, Jones detailed how the uptrend which began in 2004 has come to a halt in the past two years and even resulted in a downturn of values, especially for top quality farmland, since the first quarter of 2015.

Decade of acceleration

Per acre average values of farm real estate in Wisconsin jumped from $2,500 in 2004 to $4,700 in early 2015, Jones pointed out. Much higher percentage jumps prevailed in adjacent states during that period — $2,610 to $7,500 in Illinois, $2,200 to $8,000 in Iowa, and $1,800 to $4,700 in Minnesota while Michigan's value went up from $2,920 to $4,900.

There's little doubt that those changes were driven by record high cash prices for grains during that period, Jones noted. He suggested that the prominence of the dairy sector in Wisconsin might have kept its average farm real estate values somewhat lower.

The overall 35-year downtrend on the interest rates for 10-year United States treasury bonds has also been a contributor to the rise in farmland values in two ways. Borrowing to purchase farmland incurred lower interest payments and the investment in land often provided better returns than the treasury bonds, he explained.

While the interest rate on the bonds slid from about 8 percent in the late 1980s to just over 2 percent in recent years, farmland values posted annual average increases of 12.35, 8.85, and 9.46 percent respectively in Iowa, Illinois, and Minnesota after having annual increases of close to 5 percent for the 1950 to 1999 period, Jones observed.

Trends in Wisconsin

Wisconsin's numbers were more modest — a 6.8 percent annual value increase from 2000 to 2015 and 5.95 percent for 1950 to 1999. Jones noted that all of those states had setbacks in their farmland values for 1981 through 1988, which was a period that coincided with the highest treasury bond interest rates.

Focusing on northern, central, and southern geographical districts in Wisconsin, Jones noticed two prevailing trends in the state. In the last decade, and particularly in the past five years, the number of farmland acres sold has fallen in all districts during most years and a very high percentage of those acres are remaining in agricultural production.

Investor returns

In a trend for which the past 30 years have provided the greatest share of value, the annual increase in farmland value across the United States has been 5.97 percent, Jones noted. That's less than the 7.93 percent average gain in the Standard and Poor's stock index for 1967 through 2013.

What more significant, however, is the average gain in value — on a combination of farmland price and rental income — in the Upper Midwest states for 1970 through 2014, Jones pointed out. In addition to posing less risk than some other investments, those annual returns averaged 15.36 percent in Iowa, 14.58 in Minnesota, 12.79 in Illinois, and 12.60 in Wisconsin.

On farmer demand for cropland, Jones outlined two perspectives — cash grain operators whose profits tend to be tied to their total number of acres and dairy farmers who achieve some insulation on feed costs by growing a large portion of their feed needs and by having land on which to apply manure in accordance with their nutrient management plan. He presented financial scenarios that indicate the bottom line significantly favors those with a dairy and cropping combination compared to a dairy operation only.

Within Wisconsin, Jones described three options as part of a long-term hedging strategy that would protect against rising costs of farmland. It involves purchasing land in lower cost areas, holding and probably renting it out for up to 26 years, and then selling it to finance the purchase of farmland in a higher cost region.

Wisconsin County data

During 2008 through 2014, farmland rents in Wisconsin averaged $89.97 per acre — or 2.4 percent on the $3,921.91 average value of the land, Jones reported. He also analyzed those numbers for nine areas of the state, noting that several rental rates of less than 2 percent of the land's value can be considered as quite low.

For 2015, farmland rents in Wisconsin peaked at $140 per acre compared to $230 in Illinois and nearly $260 in Iowa. Since then, they have all nosed downward.

As a percent of farmland value, the cash rent has been on an uneven but steady downward slope for 50 years in those states, starting at an average of over 9 percent in the three states in 1967 and meeting at just over 3 percent today.

After being very profitable from 2010 to 2012, growing corn on rented land was not profitable for the following three years and is not likely to be profitable in 2016, Jones pointed out. Those who own land are more likely to have a chance for net returns in today's economic scenario.

Acres per dairy cow

A breakout of data for Wisconsin assigns an average number of cropland acres to dairy cows associated with that land. Jones noted that this average ranged from 5.9 acres in the east central part of the state to 21.33 acres in the central part of Wisconsin.

By county, the acres of cropland per dairy cow vary greatly across the state, starting with 3.37 acres in Kewaunee County, 3.6 in Brown County, and 3.66 in Manitowoc County to more than six acres in other fairly significant dairy counties such as Waupaca, Monroe, Wood and Rusk.