Agricultural Economics Department
Date of this Version
7-1990
Abstract
In Nebraska, 1989 was another year of active market activity and increasing agricultural land values. These were two of the findings evident from the 1990 Nebraska Farm Real Estate Market Survey reports. The 1990 survey revealed a smaller average rate of increase of 9 percent during the 12-month period ending February 1, 1990 than reported for the year earlier. This smaller increase is a reflection of previous increases in farmland values and some decrease in net farm income during 1989.
The crop reporting districts showing the highest average land value change for the 12-month period were the North and Central Districts with 18 and 17 percent respectively. These increases were fueled by large gains in grazing land values, with cropland values also showing relatively large gains.
The greatest portion of buyers again were active farmers, frequently looking to expand existing farm operations. These newly purchased parcels were often within 5 miles of the buyers' residences, implying very geographically-localized markets. The primary reasons for selling farmland in 1989 were estate settlement and retirement/health.
Of the actual transactions during the 1989 observed survey reporters, 42 percent were cash sales involving no debt. The incidence of cash sales has decreased gradually over the past 3 years. Mortgage financing has increased slightly in recent years to 47 percent of the transactions reported in 1989.
For 1990, reported cash rental rates on cropland either remained relatively stable or were slightly higher than 1989 levels. But the 1990 pasture rents experienced most dramatic increases, especially on an AUM (animal-unit-month) basis. The combination of reduced forage production from dry weather and profitable livestock prices has been the force behind these increases in pasture rents.
Rates of return to farmland given by reports is an estimate of the net rate of return that land owners in their area could expect at present real estate values. The percentage rates found for each type of land varies, but for 1990 the estimated rates of return on irrigated land, dryland cropland, and grassland were relatively consistent across regions. Irrigated land showed the highest rate at 7 percent with dryland cropland and grassland following at 6 and 5 percent respectively. These estimated rates of return for 1990 tended to be slightly lower than those of 1989.
The expected rate of return from farmland is very especially important when looking to purchase land with borrowed capital. One fundamental principle for a sound financial management program is to use debt capital only when the rate of return for the asset matches or exceeds the rate of interest on borrowed capital. Judging from the averages reported in the survey, farmland currently will not generate rates of return adequate to justify heavily debt-leveraged acquisitions. Even when the buyer is willing to forgo returns on his/her own equity, the debt serving potential is still constrained.
As for future outlook, most survey reporters expected 1990 market activity to be similar to or slightly greater than 1989. Farm real estate conditions seem to dictate stable to slightly increased values for 1990, with the weather being the main determinate of the outcome.
Comments
Published by Department of Agricultural Economics, Report No. 162, July 1990. The website address is: http://www.agecon.unl.edu/realestate.html
Sincere appreciation goes to the survey reporters for their participation in the annual UNL Nebraska Farm Real Estate Market Survey. Without their valuable input, much of the information within this report would not exist.