Southwestern Minnesota farmland values decline 8 percent in 2015

Rock County bucks trend with average increase of more than 19 percent

Southwestern Minnesota farmland values decline 8 percent in 2015

Rock County bucks trend with average increase of more than 19 percent

Farmland values in 14 southwestern Minnesota counties had been steadily increasing until 2014, according to an annual survey of farmland sales.

The survey reports bare farmland sales to non-related parties for the first six months of each year.  After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014.  This trend continued in 2015. 

This year the decline across the fourteen counties averaged 8.3 percent.  Average land values had not declined since 1996 when the average southwest Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 of $8,466, then declined in 2014 and again to $6,929 in 2015.

Data from these counties indicate prices decreased from an average of $7,556 in 2014 to $6,929 in 2015 or a decrease of 8.3 percent. This is only the second percent decrease as far back as this data has been collected since 1995. In 2013 was the largest year-to-year increase of 35.6 percent. 

Farmland prices decreased in 10 counties and increased in four counties including Chippewa, Lac qui Parle, Nobles and Rock from 2014 to 2015. The largest increase was in Rock County with an increase of 19.2 percent, while Cottonwood experienced the largest decrease of 27.2 percent for the sales that met the bare farmland to non-related party transaction.

Rock County had the highest average sale price of $11,148 per acre and Lac qui Parle the lowest at $4,765 per acre. 

The quality of the land sold within a county may be a factor in the wide swings in the prices from year to year in individual counties. The number of sales in each county varies greatly from year to year.  The 8.3-percent decrease is well below historical increases of 1 to 2 percent. 

For the last 10 years there have been large percentage increases. In the eight years before 2014, prices increased at an annual rate of 15.3 percent.

 

What drives land values

There are several factors that have an effect on land values.  Farm incomes, grain prices, interest rates, return on other investments and 1031 exchanges are often mentioned as reasons for the increase. 

Farm profits were weaker in 2013 and turned negative in 2014 and 2015 with lower commodity prices.

There were three consecutive years with record farm profits in the Southwest Minnesota Adult Farm Management program, from 2005 through 2007. In 2008 and 2009 profits were good, but not at record levels.  In 2010, 2011 and 2012 profits were at record levels. 

In 2013 half the farms in adult farm management in Southern Minnesota lost money on corn production.  This loss increased in 2014 and 2015. Many hog and dairy producers experienced a tough year in 2010, many with losses instead of profits with poor prices for their commodities and high feed costs. 

If the average farmer had a loss in 2014 and this trend continues in 2015, this would soften local demand for the land from farmers. 

Interest rates continue at historically low levels and land rental income is comparable or higher than what an investor can earn from treasury bills, bonds or certificates of deposit at financial institutions. The stock market rebounded significantly since its low in March of 2009 to record levels at the end of 2014, but was fairly level in 2015. 

The 1031 exchange is for farmers or property owners who have land in an area of increased value due to location to city or development and rather than pay taxes on large gains from the sale of land, they purchase like property or other farmland at a more reasonable price elsewhere, which increases rural farmland demand.  

 

Which direction will land values go? 

Which direction farmland values go will depend on several factors. Supply and demand will determine this. The simple return on investment, which is determined by rental rates, will determine how competitive farmland is compared to other investments and this will determine a value for farmland.

Corn and soybean prices for the 2016 crop are much lower than previous years. This should have an impact on profits, farm rental rates and eventually farmland values. The government programs have an influence as well through the Farm Bill.

If interest rates rise or farm rental rates fall, the value of land is sure to be affected in a negative way, and that will cause a decrease in land values.  

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