Cash Rents Stable

By Mark E. Akers, ARA, Director of Appraisal Services

Based on the annual benchmark farm analysis completed this summer by 1st Farm Credit Services appraisers, average farmland values throughout 1st FCS’ 42-county service area increased slightly (about two percent) over one year ago.

The total number of farm real estate sales across our service area also was up slightly this past year. Most of these sales are from estates and retiring farmers. In transitional areas located around the Chicago collar counties – and to a lesser extent around the larger downstate towns such as Peoria, Bloomington and the Quad Cities -- we also continue to see strong sales of land for development. Today, we see very few forced sales of farm real estate.

The market continues to produce a substantial number of farm real estate sales for cash, requiring no outside financing. This is an indicator of strength in the non-farm economy, as well as a number of agricultural producers’ financial wherewithal.

In addition to our own appraisals for new farm mortgage loans, as well as our fee appraisals, we also collect information on these other farmland sales. This provides 1st FCS with the most comprehensive farm real estate sales database available, tracking market activity and providing current values.

All this information is factored into our annual review of a selected group of benchmark farms throughout our territory. These farms are representative of the types of farm real estate found in our service area and, by reviewing the same farms each year, we get a very accurate picture of market value trends.

Varying values

As the "Five Years of Benchmark Land Value Trends" graph illustrates the values of eight benchmark farms in various counties show a general upward trend over the past five years. This trend continued in the period of July 1, 2001 to July 1, 2002 when our benchmark farms in aggregate increased in value 2.12%.

However, local values can fluctuate significantly. Overall, our benchmark farm appraisals exhibited a wide range of value changes as shown in the "Summary of 1st FCS Benchmark Value Changes" table. The change in land values is from –4.09% to +15.93%. The upper end of the range is from the benchmark farm in Knox County.

The average change of the "Excellent" benchmark farms (Class 1A) is an increase of 1.44%. The average change in "Good" benchmark farms (Class 2B) is an increase of 3.42%. The average change in the "Average" benchmark farms (Class 3C) is an increase of 1.84%.

Classes 1A and 2B farms have continued to increase slightly over the past five years, reflecting that there is still demand for these types of farms. Investors, in particular, are looking for the high quality farms.

However, over the past five years class 3C farms have generally risen in value faster than the higher quality farms. This is because many local farmers have recognized that based on price per Productivity Index unit (potential production), these farms lagged the more significant increases of class 1A and 2B farms. That gap has slowly been closing (Table 1), but leveled off somewhat this past year.

Local producers tend to be the primary buyers of these properties. The exception to this rule is acreage with large amounts of non-prime farmland, wetland and woodland. These properties for the most part are being bought by absentee owners who are purchasing them not for agricultural purposes but for recreational purposes like hunting and having a country retreat from their city life. This market is growing significantly, particularly in the western portions of our territory and the traditionally strong recreational areas around the Illinois River and Mississippi River.

The development factor

There is sufficient strength in the non-farm economy to fuel continued expansion of suburban and semi-rural housing and commercial development. The sale of farmland for development generally results in reinvestment by the seller in the form of a like-kind or tax-deferred exchange. This results in upward pressure and support of farmland values despite low commodity prices and increased farm operating costs.

There is no place where this trend of conversion from agriculture to residential and commercial use is more evident than in the Chicago collar counties. This development pressure has been strong for the past decade and is expected to continue as long as interest rates remain low.

The number of tax-deferred exchanges continues to increase, with sellers fanning out across northern and central Illinois to obtain farm real estate. These tax-deferred exchanges tend to compete with local buyers, and can place the latter at a disadvantage because of the substantial tax benefits reaped by the exchanger. This willingness to pay more, however, is supporting land values.

An interesting twist to this trend is happening in Kane and McHenry counties where an attempt is being made through zoning to maintain the agricultural natures of the counties. This has resulted in a split market for open (non-developed) land in these counties. Agricultural properties in the eastern portions are almost entirely being transitioned from agriculture to residential and commercial use. The western portions, lying primarily west of Illinois Route 47, generally remain agricultural in nature.

It will be interesting to see if this tactic to preserve farmland is able to withstand the tremendous development pressures being focused on the western portions of those counties.

Table 1

Stable farm income

Another factor supporting current farmland values is relatively stable farm income. Cropland farms have had strong net farm income resulting from excellent yields in 2000 and from government payments in 1999 through 2001. It appears that the new Farm Bill, and the attitude toward supporting a strong agricultural economy, will add to continued strong average net income on well-managed farms.

The new Farm Bill attempts to rely more heavily on counter-cyclical payments for a wider variety of crops. Early indications are that it reacts more advantageously to low prices than to low production. So, we may still see some future disaster payments in areas of low production to make up for this deficiency.

The net operating income (NOI) range in "Table 2" indicates the typical range for each benchmark farm class in this most recent study.

Another factor that will continue to help support farmland values is the advance in technology that brings economy to farming operations. GMO products and improved chemicals are resulting in fewer field passes and higher yields. GPS systems provide for accurate measuring of yields and allow for more productive application of chemicals and fertilizer.

Table 2

Building contributions

Building improvements on farm properties have limited value to most expanding farming operations. The value of farm buildings, such as machine sheds, grain storage and barns, continues to show strong depreciation from functional and external forces. Livestock buildings have shown a drop in value over the last year as a result of the extremely low farm gate prices for pork and beef.

There are few specialized beef units left in our area. And hog units are again under stress. Small units carry little value. There is demand for newer hog units that meet the needs of contracting integrators, and for modern units that are of a sufficient size to contract directly with packers.

The value of residential improvements on farms is continuing to be strong and increase in most areas. There is demand for these structures from non-farm buyers that are willing to buy the house and a few acres at a premium price. Most sellers of farms are recognizing the potential to split the house and some buildings from the farm to obtain a higher price. This forces competition between farm buyers and residential buyers for the building sites. This type of demand is found in all but the most rural areas of our association territory.

Cash rent ranges shown in "Table 3" have been stable throughout our area for the last two to three years. This reflects a combination of factors: 1) commodity prices are low and appear likely to remain low; 2) government payments are supporting farm income; and 3) larger farming operations are able to lease additional land without incurring additional fixed cost. There are some pockets showing increases, but mostly due to localized specialty crop contracts.

In conclusion, it appears that land values in most of our 42-county area are stable to increasing slightly. Notable exceptions are DeKalb County which has shown strong pressure from reinvestment and tax-deferred exchange dollars, and lower quality farms which have shown a steeper upward value trend over the last few years. Cash rents are mostly stable throughout the area, reflecting a positive – but not over-enthusiastic -- attitude toward future farm income.

Table 3