Nebraska Farm Real Estate Reports

Land Values and Cash Rents: 2008 Summary

Fri, 03 Oct 2008 11:45:30 PDT

Farm real estate values, a measurement of the value of all land and buildings on farms, averaged $2,350 per acre on January 1, 2008, up 8.8 percent from 2007. The $2,350 per acre is a record high and $190 more than a year earlier.

Both cropland and pasture values for 2008 are record highs. Cropland values rose by 10 percent to $2,970 per acre, up from the previous high of $2,690 in 2007. Pasture value rose by 6 percent to $1,230 per acre.

While commercial and residential development has slowed in many regions, farm real estate values continue to increase. Strong commodity prices and farm programs, outside investments, favorable interest rates, and tax incentives continue to be the factors that drive farm real estate values to record levels. Livestock prices, recreational use, and urban development remain the predominant influences that increase pasture land values.

Regional increases in the average value of farm real estate ranged from 1.6 percent in the Northeast region to 15.5 percent in the Northern Plains region. The highest farm real estate values remained in the Northeast region, where development pressure continued to push the average value to $5,080 per acre. The Northern Plains region had the lowest farm real estate value, at $1110 per acre, up 15.5 percent from the previous year. In the Corn Belt region cropland values rose 14.8 percent, to $4,260 per acre. The Southern Plains region increased 12 percent from the previous year, to $1,490 per acre.

The Northern Plains region also had the highest average percentage increase in pasture value, 19.7 percent above 2007. In the Southern Plains and Mountain regions, which account for more than half of the pasture in the U.S., pasture values per acre increased 17.1 percent and 6.4 percent, respectively.

Nebraska Farm Real Estate Market Developments 2006-2007

Bruce B. Johnson — Fri, 03 Oct 2008 11:43:20 PDT

Nebraska agricultural land values rose sharply during the year ending February 1st, 2007 according to the UNL Nebraska Farm Real Estate Survey. The all-land value increase was 14.0 %, the largest annual percentage increase in 19 years. Sharply higher crop commodity prices towards the end of 2006, the result of a rapidly-expanding ethanol industry in the state, appeared to contribute greatly to the run-up in land values. In addition, potential for further irrigation development in some areas of the state led to spirited bidding for such land; while regions experiencing water restrictions had more muted value changes for the year.

In such a dynamic market, it is reasonable to expect greater risk and uncertainty. Indeed, reporters, when asked to compare the next few years with current levels, did foresee greater risk and uncertainty ahead. This was true of future land value volatility, cash rent shifts, and income returns to land.

In addition to current crop prices, purchase for farm expansion was cited as a strong contributor to land market value advances in the current market. Non-farmer investor interest and the associated opportunities for “1031” tax exchanges also continue to create upward pressures on land values according to survey reporters, but not to the extend of influence of recent years. Related to this reporter perspective was the greater incidence of purchases by active farmer/rancher buyers in 2006. For the actual reported sales for 2006, 71 % were purchased by active farmer/ranchers as compared with 61% in the previous year.

For cropland, cash rental rates for 2007 rose sharply across the state with increases generally in the 10 to 12% range. These higher income earnings associated with cropland tended to parallel the value advances, thus leading to estimated net rates of return being essentially unchanged from year earlier levels. For several years, these net rates of return had gradually declined.

The 2007 rents for pasture were essentially similar to year-earlier levels as the cattle sector experienced some reduced profit potential in 2006. Since grazing land values climbed during the year, the net rate of return on pasture land continued to decline.

A majority of reporters in the early-year 2007 survey saw the level of real estate sales activity in 2007 being similar to 2006 levels; although of reporters expecting some change in the number of sales, the number expecting some increase outnumbered those anticipating a decrease by nearly three to one.

As for anticipated value changes during 2007, a very strong majority of reporters looked for continuing advances in every region of the state. Overall, nearly nine out of every ten reporters expected further appreciation in agricultural land values in 2007, averaging about 9 percent. In a special mid-year 2007 electronic survey of a smaller sample of respondents, nearly all reported that values for dryland cropland and irrigated cropland had climbed further since the first of the year. The average reported increase was more than 10%. A slight majority saw increases in grazing land values (also more than 10%) while nearly half saw steady values.

Nebraska Farm Real Estate Market Developments 2005-2006

Bruce B. Johnson et al. — Fri, 03 Oct 2008 11:39:09 PDT

Nebraska’s agricultural land values rose an average of 9.6 percent during the year ending February 1, 2006. This brought the state’s average all-land value to over $1,000 per acre and the total worth of agricultural real estate to more than $45 billion.

In the wake of a series of generally favorable income years for most of the state’s agricultural sector, land values have advanced rather sharply over the past three years – particularly in the eastern third of the state. The three eastern districts have experienced value increases of 40 percent or more since February 2003.

In contrast to these sharply higher values, some other areas of the state have experienced more moderate gains and even some value declines. This occurred in the South District during the year ending February1, 2006 where the all-land average value declined over four percent. The declines in that area were closely associated with the irrigation land classes. Likewise, gravity irrigated cropland in the Southwest district was down slightly for the year as expectations of future irrigation water availability remain uncertain in these areas.

General market characteristics in 2005 were similar to those reported in recent years. Based on reporter information on 475 actual, representative sales, about half of all purchases were for cash with no debt financing, even though the average dollar value per transfer exceeded $300,000 in every district. About three of every five buyers was an active farmer/rancher. Nonfarm buyers reportedly had a significant presence in most local markets across the state; and their activity is seen as a contributing factor in the upward movement of land values.

Despite large dollar jumps in petroleum-based farm inputs, cash rental rates for cropland in 2006 were not negotiated lower in most regions of Nebraska. In fact, some modest increases in 2006 cropland cash rental rates occurred in the eastern districts.

This year, UNL reporters provided valuable insight into the dollar adjustments typically being made to average cash rental rates when the tenant is providing some of the irrigation system. The sharing of the irrigation system components is an increasing occurrence.

Results of the 2006 UNL survey suggest that associated percentage net rates of return to agricultural land continue their gradual decline of several years duration. Current annual net rates of return are in the three to five percent range for much of the state’s agricultural land base.

Nebraska Farm Real Estate Market Developments 2007-2008

Bruce Johnson et al. — Fri, 03 Oct 2008 11:34:57 PDT

In this, the 30th year of the UNL Farm Real Estate Market Developments Survey and report series, some of the most dramatic changes ever in the market have occurred. During the year ending February 1st 2008, the average value of Nebraska farmland rose 23%, the largest annual increase in the series. Virtually every region of the state experienced strong cropland value increases. Cash rental rates experienced record advances as well, with 2008 levels for the cropland classes being 17% to 24% higher than 2007 levels. Clearly, the agricultural real estate market has responded to crop commodity prices which have shot upward to record levels, and with them economic returns to land that few would have thought possible just a few years ago. Domestic demand from the ethanol industry coupled with a growing world demand has tipped the supply/demand dynamic to a point where market participants are factoring in a whole new paradigm of income expectations into the land market decision framework.

The rapid rise of Nebraska agricultural land values over the past four years (an average increase of 72%) raises concern that this may be a real estate bubble that is not sustainable and hence lead to subsequent devaluation. However, the income fundamentals underlying the recent increases appear sound. Active farmers have returned to dominate the buying side of the market in most regions of the state, accounting for nearly three-fourths (73%) of the Nebraska purchases in 2007. In contrast, active and quitting farmers represented only a third of the selling side of the market.

One indicator of the current financial strength of the market is the fact that half of the reported sales during 2007 were cash purchases with no debt financing incurred. This was even more significant, considering that the average purchase price exceeded $400,000 per parcel in seven of the eight sub-state regions.

Compared with recent years, both the reported and the calculated net percentage rates of return to the various agricultural land classes have risen. This is an indication that buyers are using some caution and factoring greater risk considerations into their maximum bid determinations. In other words, the new levels of economic returns to land are not being fully capitalized into the land values. Given the increased volatility of the entire agricultural economy, this is a positive sign that the land markets are responding responsibly.

As for 2008 expectations, the vast majority of UNL survey reporters (86%) anticipated further increases in agricultural land values during the year. On average, they were expecting increases of 12% for the year. The majority of reporters (63%) expected the level of market activity—number of parcels being offered for sale—to be similar in 2008 to levels of recent years.

Nebraska Farm Real Estate Market Developments 2004-2005

Bruce B. Johnson et al. — Tue, 06 Sep 2005 14:25:24 PDT

During a period of record-level farm incomes, Nebraska farmland values rose an average of 11.9 % for the year ending February 1, 2005, the largest annual percentage increase of the past 16 years. The increase followed the sizable advances of the previous year, in contrast to several recent years of fairly stable to moderate value increases. While increases were reported by UNL survey respondents across the entire state, there was considerable variability in magnitude of percentage gains. Largest gains were recorded in southeast and eastern Nebraska, with changes of 18.8 % and 13.5 % respectively. Much smaller annual gains were recorded in northwest and southwest Nebraska, particularly for cropland classes–both areas where multi-year drought impacts have continued. Being an income-producing asset, it is reasonable to expect some correlation of land value changes with farm income trends and conditions. In fact, when plotted over extended multi-year periods, it is apparent that a gradual improvement of farm income levels over time have, in fact, created a fl oor for the land value movements that have occurred. While farm income impacts land values in a number of ways, UNL survey reporters placed, for the fi rst time ever, non-farmer investor interest and “1031” tax exchange opportunities as the two most signifi cant factors currently contributing to higher land values. Clearly, the local markets for agricultural land across the state have gradually taken on a much stronger presence of non-farmer buyers and interests in recent years. And until such time that economic conditions improve for alternative investments and/or capital gains tax provisions are altered, it is likely that these demand elements will continue. Correlated with the above, this year’s survey results regarding actual farmland transfers which occurred in Nebraska over the previous 12 months found that active farmer/ranchers represented less than three-fi fths (59 %) of all the buyers. This was the lowest annual percentage by this buyer group in more than 20 years of tracking these market patterns. As land values were rising sharply for most types of land across the state, cash rent levels for 2005 were generally advancing only moderately over previous-year levels. Lower crop prices and rising non-land input costs at time of negotiating 2005 cash rents kept the bidding process more cautious for 2005, in spite of high income levels in 2004. For the first time in the farm real estate series, extension educators in a number of Nebraska counties conducted supplemental rental surveys which provided more comprehensive and localized measures of rental market conditions. While differences can be observed in these countylevel findings from the regional data series, the patterns were generally consistent with the ranges for the region.