Here's what you should know about buying and selling farmland

Here's what you should know about buying and selling farmland

It's no secret that buying or selling farmland is a major step for farmers. Many farmers look to take the step or make investments for the future at some point in their careers.

In fact, according to the 2018 Iowa State Land Value Survey, 72 percent of farmland sales were to existing farmers.

However, for those new to farmland sales, the decision could be daunting without the right information.

Don't let the buying process give you reason to worry, though. Here is an overview of the information you should know when purchasing farmland.

Farmland values are at record highs

Yes, farmland is expensive - in fact, its value nationwide is at a record high - but many see it as a good long-term investment.

Ag Update notes in an August 2018 article that farmland values across the country increased 1.9 percent from 2017 to $3,140 an acre. That statistic comes from the U.S. Department of Agriculture.

This increase, the article points out, shows that farmland purchasers are focusing on buying farmland as longer-term investments, even if certain short-term outlooks may seem uncertain.

Evaluating a farmland purchase

Retired economic William Edwards takes a closer, more detailed look at how potential buyers can approach land purchase decisions. In reports for Iowa State University, Edwards describes two approaches.

The first approach is an economic analysis. This involves a potential buyer looking at how much the land is worth based on its net income earning potential. An economic analysis is an in-depth process that Edwards discusses more in a report posted online (PDF).

The second approach is a financial analysis. In this case, the potential buyer asks whether the land will generate a positive cash flow after paying all the owning costs, operating costs and any debt payments. Edwards takes a deeper look into this approach in another online report (PDF).

Understanding the Iowa farmland market

The 2018 ISU Land Survey states that, overall, the farmland market is stable in Iowa. The survey's authors note that the farmland market is stabilized, mostly, by several factors.

The farmland market is tight

First, according to the survey, is that the market in general is extremely tight. For the fifth straight year, most survey respondents reported that there were fewer land sales in their county than there were in the previous year.

The limited number of sales helps support the farmland market's prices, the survey's authors state.

Most farmland is fully paid for

Second, the land survey cites another survey, the 2017 Iowa Farmland Ownership and Tenure Survey, which shows 82 percent of farmland in Iowa is completely paid for. Also, 29 percent of Iowa farmland is owned for family or sentimental reasons.

The ISU survey authors say this plays a part in the limited land sales and the current strong demand.

Good crop yields

"Exceptional crop yields" are cited as the third reason farmland markets in Iowa have been stable over the last five years.

The survey notes that the last six corn crops are the largest the United States has ever produced. The United States Department of Agriculture also projected a record national soybean yields.

Interest rates are still helping farms

Although interest rates have increased recently, as the survey states, they're still below-average compared to recent history and are well below levels from before the recession. The survey authors state lower interest rates have kept interest expenses at "modest levels" and have helped support farm profitability.

Iowa farmland values

Iowa farmland decreased in value by an average of 0.8 percent, according to the 2018 Iowa State Land Value Survey. The average statewide value of one acre of farmland is estimated to be $7,264.

The survey noted that this is the fourth decline in the past five years. It's also a 17-percent decrease from the peak in nominal land values from 2013.

The survey states this decline can be mostly attributed to lower commodity prices, higher interest rates and, to a certain extent, trade disruptions.

Overall, though, the decline in land value is "very modest" and "the land market is largely stable," according to the survey.

Who buys farmland?

Also of interest in the survey is the fact that 72 percent of farmland sales were to existing farmers. Of those sales, 69 percent went to existing local farmers and just 3 percent went to existing farmers who were relocating.

Investors accounted or 21 percent of the land purchases. new farmers accounted for 5 percent and other purchasers rounded out the remaining 2 percent, according to the survey.

Who sells farmland?

The Iowa State University Survey states that the five most common sellers are:

  1. Active farmers
  2. Retired farmers
  3. Estate sales
  4. Investors
  5. Others

Fifty-two percent of farmland sales from the survey were from estate sales. Retired farmers were the sellers in 23 percent of the transactions. Active farmers made up about 15 percent and investors were sellers in 8 percent of the sales.

Check with the experts before making decisions

As the ISU survey authors point out, it's important to look to the experts when you are considering buying or selling farmland.

The survey suggests hiring an appraiser, who can conduct a formal appraisal of a parcel, going to the county assessor's website or taking a look at the results of any recent auctions for comparable parcels in the same region.

Learn more about farmland and related decisions

At Midwest Land Management and Real Estate Inc., we specialize in helping our clients with farm real estate brokerage transactions, farm management and crop insurance.

Our firm was founded in 1988 and our current owners have 25 years of experience in the land business. Midwest Land Management's entire staff values creating long-term relationships with our clients.

Midwest Land Management covers a wide territory that spans Iowa, Minnesota and South Dakota. Real estate brokers licenses are held in all three of those states.

If you have questions about buying or selling farmland in Iowa, South Dakota or Minnesota, reach out. We'd be happy to discuss your future plans and what solutions could be right for you as you begin to make those key decisions.