Mississippi land values not falling like Midwest’s despite lower grain prices

Mississippi land values not falling like Midwest’s despite lower grain prices

Lenders are less willing to lend a high loan-to-value ratio on land, requiring potential buyers to put more equity into new purchases to protect lenders from a drop in value.

Farmland prices in Iowa and Illinois were the envy of the rest of the country in 2012 and 2013. For a while, it seemed like every other day a parcel of land in one of the two states was bringing yet another record price.

Most producers knew in their heart of hearts such sales wouldn’t continue forever, and those fears were confirmed when corn and soybean futures lost nearly 50 percent of their value due to the large grain crops in 2013 and 2014.

In 2014, as a result, Iowa agricultural land prices declined nearly 9 percent (from an average of $8,716 to $7,943 per acre). That’s according to the Iowa Land Value Survey, which was initiated in 1941 and for years was conducted by Michael Duffy, an agricultural economist who recently retired from Iowa State University.

The decline in land values hasn’t been as steep in Mississippi and other southeastern states, which never saw quite the explosion in prices that occurred in the traditional Corn Belt states in the Midwest, says Bryon Parman, assistant Extension professor at Mississippi State University.

Dr. Parman and Andrew Lewis, graduate student in agricultural economics at Mississippi State, have been compiling the results of a survey of producers, landowners and those working in the agricultural real estate and finance sectors taken in April and May to determine current trends in land values, cash rents and lending conditions in Mississippi.

Their report, Mississippi Agricultural Land Values, Cash Rents and Lending Conditions: Spring 2015, is available by clicking on http://msucares.com/pubs/publications/p2889.pdf.

Delta prices higher

“Respondents reported the highest cropland sales values occurring within the Mississippi Delta region, where irrigated cropland was as high as $4,800 per acre (with an average of $4,339 an acre),” said Dr. Parman. “Non-irrigated Delta cropland was reported as selling as high as $4,300 (average of $3,163 per acre.)

“Despite being the highest in the state, these values are markedly lower than in other states such as Illinois, which reported a sales value of $7,700 an acre for quality cropland just last year, or Iowa, which reported a cropland value in 2014 of $7,393 per acre.”

Farmland values not in the Delta averaged 22 percent and 29.5 percent lower for non-irrigated and irrigated cropland than Delta cropland, Parman noted. The average price reported for non-irrigated, non-Delta land was $2,457 per acre and for irrigated non-Delta land, $3,061.

In a similar survey for 2013, respondents reported flood-irrigated Delta land selling for an average of $3,966; pivot-irrigated Delta land for an average of $3,628; and quality Delta dryland for $3,238 per acre. The statewide average for flood-irrigated land was $3,988; for pivot-irrigated, $3,628; and for quality dryland, $2,734.

“The substantial drop in the price of corn, soybeans and cotton over the last year has substantially stunted the growth of both land values and rental rates,” said Parman, referring to the Mississippi survey. “The outlook for commodity prices for row crops into 2015 is discouraging as well, with many experts projecting prices to stay low or go even lower as the U.S. moves into the fall harvest season with ending stocks high.”

Parman says average cash rental rates for cropland have declined slightly as farmers look at current high input costs and low commodity prices. Some who renegotiated rates for 2015 appear to have contracted ground at a lower rate than previous years. Others who may be locked into multiyear agreements, however, are still paying rates near record highs of a year ago.

Walking away from contracts

“In areas where rents exceeded $400 per acre, reports have surfaced of producers walking out on contracts due to commodity prices that do not support such rates,” he notes. “However, should commodity prices remain lower over the course of the next year or two, average cash rental rates should continue to fall as longer-term rental agreements go up for renegotiation.”

The other driver of land values in agriculture is the available funding for new purchases. Historically low interest rates have made financing relatively inexpensive for potential borrowers, which has contributed to the run-up in land values of recent years.

“An increase in interest rates, which most respondents of this survey expect, means that the principle amount of any future loan must decline to keep payments manageable for potential borrowers,” says Parman.

Also, as farm incomes were high, lenders were willing to lend up to 90 or 95 percent of the value of purchased farm ground under the assumption that the land’s value would continue to increase. “This survey shows lenders are less willing to lend such a high loan-to-value ratio on land, requiring potential buyers to put more equity into new purchases to protect lenders from a drop in value.”

For more information on Midwest land values, visit https://www.extension.iastate.edu/agdm/wholefarm/html/c2-70.html

Also, see http://www.nass.usda.gov/Statistic_by_Subject.

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