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Cropland prices have grown at staggering rates over the last decade, and farmers ask what’s next as prices flatten out By  Danielle Kurtzleben November 13, 2013 Dan Meyer plants corn on his family’s farm May 10, 2008, near Hampshire, Ill. Land prices are twice as high as they were just 10 years ago. Is a bubble about to pop? ELDORA, IA. – The auctions are unintentionally silent today at the Pine Lake Country Club. Plenty of farmers showed up on this drizzly fall morning, since it’s too wet to harvest. But as auctioneer Joel Ambrose tries to sell first one, then another field to the 40 or so farmers gathered in a golf clubhouse outside this town of 2,700, the bids are few. To be fair, many attendees came with no intention of bidding. Land auctions are a spectator sport for some – one retired farmer in the crowd says he, like many others, is killing time on a slow day. For others it’s a way to keep an eye on the market as they prepare to sell land of their own or buy new parcels. And for many, it’s a way of knowing which neighbor is willing and able to shell out thousands of dollars an acre. Today’s quiet auctions are an example of a broader pattern taking place across the upper Midwest, as a land market that was booming just a few months ago flattens out. Over the past decade, the jump in land prices has been nothing short of astounding. The national average cropland value was at roughly $2,170 an acre as of 2004, in 2013 dollars. In 2013, the value had nearly doubled, to $4,000 per acre, according to U.S. Department of Agriculture figures. And while nationwide cropland values grew at these remarkable rates, they have risen by leaps and bounds in the grain belt states. USDA data show South Dakota cropland values grew by 28.6 percent from August 2012 to August 2013. In Nebraska, it was 17.8 percent. In Iowa, it was 20 percent. And in North Dakota, it was an astounding 36.3 percent. But the growth is slowing. In Iowa, home to some of the most valuable cropland in the nation, farmland values rose by only 1.2 percent from March to September, according to a September survey from the Iowa Realtors Land Institute. That’s a marked slowdown from the 10.6 percent average increase the state saw over the prior 12 months. And in three of the nine districts reporting figures, prices fell. Other upper Midwestern states are showing similar patterns as well. “Dirt Dealer” Jeff Obrecht, left, negotiates with a seller and potential buyer Joe Ludley, right, over a 160-acre farm. (Danielle Kurtzleben for USNWR) The stall in prices is evident at today’s auction. As Ambrose calls the auction, the bidding sticks at $7,500 an acre. Jeff Obrecht, the realtor running the auction, interrupts. “OK, everybody. We’ve got $7,500 on the farm. I cannot sell it for $7,500 right now,” says Obrecht in a voice made gravelly by a cold, which has prevented him from auctioneering today. “And everybody’s gonna say, ‘What do you gotta have?’ I need $8,000.” The farmers study the land information sheets Obrecht passed out at the start of the auction — legal-sized pieces of paper that explain exactly what a buyer will get. This parcel is 104 acres, with 100 acres of cropland. It scores a 70.2 out of 100 on the corn suitability rating scale, a measure of soil quality that predicts how well a field will grow row crops like corn and soybeans. Maps show the location and a satellite view of the land, and yet another multicolored map shows in great detail the different types of soils in different parts of the field (today’s bidders know, for example, that 17.2 percent of the field is made up of a soil type called Colo-Ely silty clay loam). Obrecht tells Ambrose to go again, and the auctioneer calls to a quiet room for another minute before Obrecht steps forward and interrupts. “We’re gonna no-sale it at $7,500,” he tells the crowd. He then disappears to confer with the seller. Several bidders pick up their cell phones and walk outside. Ten minutes and several hushed conversations later, Obrecht writes “$7,596” in green marker on the whiteboard at the front of the room. It took some finagling, but he found his buyer. On the second parcel, a 160-acre area (65.3 on the corn suitability rating scale) that includes a farmhouse, the selling is no better. Ambrose starts the bidding at $4,100 but, after a few minutes assisted by Obrecht’s occasional interjections (“It’s worth it!”), he cannot get the bidders to move past $4,500 per acre – $500 below what Obrecht says he needs to sell the land. Obrecht no-sales the land, but once again, the auction isn’t really over. Soon, Obrecht finds himself shuttling between two tables of still-interested bidders and the two sellers, a pair of brothers in their late 70s. One set of bidders, Steve Futrell and his father-in-law Joe Ludley, consult a homemade spreadsheet that tells exactly how much they’ll pay depending on the price per acre. After 15 minutes of intense negotiating and scratchpad calculations, Futrell and Dudley shrug and decide they will let the other bidders take the land for $5,125 per acre. On both of today’s properties, the sellers accepted prices well below the average for medium-quality cropland in Iowa, which stands at nearly $8,800 per acre. And many sellers may find themselves adjusting their expectations downward in the coming months. High commodity prices were a key factor in pushing farmland values up. Higher prices create higher incomes for farmers, meaning more money to spend on land. But those prices are falling. While corn sold at just over $8 a bushel at one point last year, it is now at around $4.30. And soybeans are now selling at less than $13 an acre, down from last year, when they were pushing $18. As corn and soybean prices fall, farmland values will also be affected. “We had such a jump in prices at the ethanol demand, the Southeast Asia and China demand, all of that combined, that we had prices really shoot up,” says Mike Duffy, professor of economics at Iowa State University. Higher prices, however, led to more production, which has pushed prices downward. Though last year’s drought helped keep prices up, this year’s yields should help push prices down. “When you look at the futures today, you’re seeing prices really drop off,” he says. It could be a slow deflation of high prices. But for some farmers, it brings to mind the farmland bubble of the late 1970s, when land prices skyrocketed, also due to high commodity prices, Duffy explains. According to the USDA’s Census of Agriculture, which is generally performed every five years, farmland prices went from an inflation-adjusted $1,600 per acre in 1974 to over $2,200 in 1978, before falling back to $1900 in 1982 and less than $1,300 in 1987. Many farmers who borrowed to buy land found themselves underwater on their loans, and the crash left many farmers broke. “It was a disaster period,” says Arvin Haywood, a 78-year-old retired farmer from Conrad, Iowa. “There were periods of time where they couldn’t even sell the machinery because farmers weren’t making a lot of money. In that period of time, in the early ’80s, we lost a lot of young farmers.” There are those who foresee similar trouble ahead for landowners. Earlier this year, minutes of the Federal Advisory Council, a group of bankers that advises the Federal Reserve Board, found members worrying that the price of farmland has once again grown overinflated. “Agricultural land prices are veering further from what makes sense,” they said, according to records obtained by Bloomberg. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.” Still, though prices are poised to sink, there is some consensus among experts that deflating prices won’t devastate farm country the way the 1980s bubble did. The 160-acre farm that Obrecht eventually sold for $5,125 an acre. (Danielle Kurtzleben for USNWR) That’s because farmers aren’t as highly leveraged on their fields as they were in the 1970s. Back then, only around 67 percent of land was held without debt, says Duffy. Today, the figure is around 78 percent. Just as the housing crisis wouldn’t have been as bad without underwater homeowners, the farm bubble can’t pop as loudly if farmers aren’t deeply in debt on their fields. Another broker lists a lack of under-water landowners among the positive factors in the farmland market today. “The reason why land value dropped [in the 80s] so much was multifaceted. One we had multitudes of people upside-down — they had borrowed more money against their farm than what the farm was worth,” says Randy Hertz, accredited farm manager and land consultant at Hertz Farm Management, an Iowa-based land brokerage firm. He adds, “They also had interest rates that were in the double-digits.” High interest rates in the 1980s made it hard for farmers not only to pay for their farms but also for any other investment that required financing, like expensive machinery, meaning tough times were made even tougher. But today, farmers, like homebuyers and other small business owners, are seeing interest rates at near-record lows. The latest price fall-off isn’t showing up in all farm sales, says Obrecht. The best fields can still easily pull in over $10,000 per acre, he says. “Good dirt will still sell well,” Obrecht explains. “But if it has any blemishes at all, the guys are not as aggressive as they were.” Both of today’s farms up for sale have blemishes that have hurt their sale prices, he says. Neither are rectangular, and a farm without square edges can make it harder to maneuver a massive combine or plant rows efficiently. The second property is bisected by a creek, meaning fewer farmable acres than the buyer is paying for. Arvin Haywood knows the field, and describes it as being full of “blowsand” – light soil that will effectively sandblast young corn plants to death in windy weather. Speaking after the auction, Obrecht will also note that one farm for sale today features terraces that aren’t wide enough for some machinery. “My buddy has a 32-row planter,” explains Obrecht. “He could go up that field, but he can’t go back.” As those low-quality fields lead the downward price spiral, Duffy says farmers who borrowed heavily to finance big land purchases could be in for rough years ahead. “For some people I think it’s going to be a problem,” he says. “I think some people will be exposed who used maybe two or three parcels to pay for another parcel.” In part, it boils down to what commodity prices do. “The bottom line in all of this is what’s the income?” Duffy says. Pulling income upward is Asian demand for corn and soybeans. Then again, if ethanol continues to fall out of favor among both lawmakers and environmental groups, it could help to drag prices even lower. Obrecht isn’t worried, but then, bravado is in his nature. The shaved-headed 60-something has been selling farms for more than three decades, and has dubbed himself “The Dirt Dealer.” He has emblazoned the moniker on hats he hands out post-auction, flags he has planted at the end of the country club driveway for the day, and even the license plates on his pickup truck (“DRTDLR 2”). Dirt dealing has been good to Obrecht – “I’ve had more fun in the last five years than in the first 30,” he says — and he expects it to be so in the coming months and years. “Our operators are financially in so much better shape” than 30 years ago, he says. “Lending is so much improved since the 80s.” Carroll and Leon Herndon, the elderly brothers who sold the land, have two reasons for selling: money and time.”We wanted to catch the best market we could,” says Leon, “and as both of us age, we thought it would be best to get it taken care of.” Continue reading →