According to Arlin Brannstrom, farm management specialist with the UW-Madison Center for Dairy Profitability, the trend line for Wisconsin agricultural land values has increased on average by $120 each year since 2006. He questioned whether or not that trend is sustainable at the UW-Extension’s Farm Management Update for Ag Professionals in Kimberly last week.
“Land is only worth what is can generate as far as cash flow and expectations of future earnings,” he said. He further noted, however, “Of all the years I have worked in farm management, I don’t think there has ever been a period where there has been less clarity in terms of what the future looks like. There are lots of variables here that could change things pretty dramatically.”
The tables have turned, Brannstrom explained. The optimistic opinions on land values in the 1980s didn’t hold, and here we are another 20 years later. “Did anyone ever think we would see the interests we have today?” he asked. “The tables have turned almost 180 degrees again.”
According to Brannstrom, the weighted average price for agricultural lands sold in 2011 was $3,475. He arrived at this figure through his assessment of the Wisconsin Department of Revenue’s real estate transactions. Because there is a $3 tax on every $1,000 of real estate sold, these transactions are recorded through county court houses and compiled in a statewide database. Out of the nearly 150,000 real estate transactions that occurred in the state last year, only 1,200 fit his research criteria to be counted as ag land. While the total volume of real estate transactions in the state has declined in recent years, trends show that the number of agricultural lands that have changed hands remains steady.
To be considered ag lands for his purpose of defining actual two-party transactions, Brannstrom looked at those which were coded on the transfer return document as being currently in agricultural use. He excluded sales that appeared to be family transfers between two related parties or with retained rights. He also did not take into account properties with water frontage because they could be perceived as higher value properties or have other higher-value purposes like recreational use. For the most accurate picture of the value of ag parcels, he only looked at bare land, noting that land marked as having improvements opens up a range of values. For example, a 4,000-cow dairy and a single grain bin would both be considered improvements, but there would be a significant difference in value between the two. Brannstrom also discounted the extreme high and low figures, such as land that sold from less than $300 an acre or more than $12,000 an acre.
“If you look at what we are seeing for average land value statewide, we are up from $3,256 in 2010 to $3,475 in 2011,” he said. When comparing those figures to what we are hearing about land prices in neighboring states, Brannstrom reminded listeners that unlike parcels in Illinois or Iowa, and 80-acre piece of land in WI likely includes a portion that is untillable. “When you see these really high prices of land in neighboring states, it’s somewhat of a reflection for the demand from competing large operators but it’s also a reflection of the fact that the portion of tillable land in the sale is also higher,” he added.
Brannstrom applied the ag land sales data to the map of National Agriculture Statistics Services (NASS) crop reporting districts. Each district represents eight to 10 counties. While the weighted average was about $3,475 per acre, the most frequently recorded number was around $3,000 per acre. “There are a lot more sales in the $2,000 to $3,000 per acre range than the $8,000 to $12,000 range,” he said.
Where is most of this land being sold and what percent of total sales is coming from that district over the last six years? In east central Wisconsin, he said, there is not a lot of land changing hands, at least not compared to some of the other parts of the state like west central and southwest. The same is true for southeast Wisconsin. “It’s no surprise that southeast Wisconsin is a real tough place to begin a farming career,” Brannstrom added. With so much competition for land among horse farms, strip malls and roads, there are very few farmland opportunities. When those opportunities do come up, a high price can be demanded.
Brannstrom called the Fox River Valley “one of the hot spots as far as land values in the state.” East central land values have gone up 10 percent just between 2010 and 2011, reaching an average of $4,547 per acre. While it is too early to draw any solid conclusions on the trends for 2012, he said with confidence that those values have not gone down.
“These sales [in east central Wisconsin] are between farms, not so much the urban investors competing for that land,” he explained. However, buyers had to use existing land as leverage to justify the high prices. “They were paying prices that were sustainable because they already owned land at a lower price,” he said, “In other words, if you actually did the cash flow budget on the additional 80 acres they just bought by itself, it wouldn’t cash flow. It’s the fact that I already own another 400 acres at $2,000 an acre, my average cost per acre is still low enough that I have a positive cash flow.
Areas like south central Wisconsin experienced a mix of forces that affect ag land sales. For example, the average land value in Dane County was $5,851 per acre, compared to nearby Jefferson County at only $3,977. “It is primarily a matter of the larger metropolitan forces competing for land sales in Dane County,” he said.
In his 2011 Wisconsin Agricultural Land Prices summary, Brannstrom noted that regions like east central, southeastern and south central Wisconsin are “under great pressure” from competing land uses. With a heavy concentration of large dairies, he estimated that two to three acres of cropland are required for applying the manure produced by each cow. If this trend continues, he wrote, dairy production will continue to shift away from these parts of the state. “Expanding dairy businesses may need to rely on long-term leases or manure trading arrangements to assure compliance with environmental regulations and land use constraints,” he added.
While analyzing confirmed sales is one method of monitoring ag land value trends, Brannstrom also pointed out that the other way to look at it is based on appraisal values. Badgerland Financial has seven benchmark farms throughout their trade area that they routinely re-appraise, he explained. “We are trying to measure here what is going on in the market not by virtue of current sales, but by updated appraisals,” he said.
These records are showing increases in ag land values as much as 29 percent in the six-month span from July to December 2011. That particular increase was noted on the benchmark farm in Grant County. Fond du Lac County also saw an increase in the last half of 2011 of 27 percent. Values calculated out over the last 15 years there revealed an increase of 400 percent.
No doubt, these drastic changes in ag land values could affect rental rates as well. However, Brannstrom warns, just because you know what land sold for doesn’t mean you know what the rental rate is in that market. Land values and rental rates should be somewhat related so that land owners can get somewhat of a return on their investment, like cash rent, he said. “Some people are basically betting the farm so to speak, or if they don’t own a farm they are essentially betting their future on the commodity markets and good weather, and hopefully they are able to spread some of those higher rental costs out with other land that they leased a while ago at a lower rate,” he said. Typically, rental rates run 2.7 to 2.9 percent of the land value.
To access resources on land rental rates and leasing options, visit www.aglease101.com. Also, watch next week’s Agri-View for more information on land leasing agreements.