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Duffy says land value spike will slow in coming years

By Jean Caspers-Simmet

Date Modified: 01/24/2013 12:26 PM

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AMES, Iowa —It's not a question of if, but when the rapid spike in Iowa farm land values will slow, said Iowa State University extension economist Mike Duffy.

"I look at a 64 percent increase in farm land values in just the past three years, and it isn't sustainable," said Duffy, who is in charge of the Iowa Land Value Survey, which was released last week. "I think we have to keep a realistic perspective on where we are, what's happening and where we might be going. We'll see a price adjustment, and when we do what level of land values will be supported? I think we'll see sales values dropping, but we won't see the big rush to liquidate land that we saw in the 1980s."

The land market doesn't have the level of debt that it did in the 1980s. Also, many people used contracts for deed to purchase land in the 1970s. When land values began to fall, people simply reneged on the contract. This caused the decline in asset values to accelerate.

"It's easier to walk away from a contract than a mortgage," Duffy said. "In 2007 less than 4 percent of the land was under contract and the use of contracts since then has been almost nonexistent."

Duffy doesn't think it's going to be a bubble bursting like in the 1980s when average land values dropped from $2,147 in 1981 to $787 per acre in 1986.

"I think it will be more a like a tire that gets a nail in it," Duffy said. "We'll see this adjustment to the new reality. We had a big jump up in 2006 and 2007 and we've continued up but only because we had a drought. Once those effects get worked through we'll see prices drop off."

Coming into 2012 general sentiment was that crop prices would decline from their peaks but because of the drought, prices remained at high levels.

"How long high prices will last is unknown," Duffy said. "The world is responding to higher prices, and there is an expected increase in plantings everywhere. This increased supply will eventually drive prices back down. This is similar to the early 1970s when prices increased dramatically and later declined to a new equilibrium level. We don't know what this new equilibrium level of prices will be and, more importantly, we don't know what level of land values will be supported by the new price levels."

Duffy said discipline exists in the land market. While values increased dramatically in 2010 to 2012, values decreased by 2.2 percent in 2009.

The big uncertainty is what the weather will be in 2012.

"It's scary," Duffy said. "Creeks are dry, the subsoil is dry. NASS data shows severe or very severe drought over all the state. Will we have yields in 2013? In 2012 we got lucky. These are all issues."

Duffy said among the components to watch:

• Weather related problems – both here and around the world

• Government policies – especially policies related to estate and capital gains tax rates

• The amount of debt incurred with land acquisition

• What happens to input costs – land being the residual claimant to any excess profits in agriculture

• Government monetary policies as they relate to inflation and interest rates

• The performance of the U.S. economy and economies throughout the world, which impact commodity prices and in turn impact land values