Chicago Fed: Value of 'good' Iowa farmland soared 20% in 2012

The 2012 drought apparently had little impact on the value of good Iowa farmland, which recorded another double-digit annual increase, according to the Federal Reserve Bank of Chicago.

Iowa farmland values rose 20 percent from Jan. 1, 2012, to Jan. 1 of this year. There was an 8 percent increase in the dollar value of good Iowa farmland from Oct. 1, 2012, through Jan. 1, 2013.

The survey results mirror Iowa State University's annual Iowa Land Value Survey conducted in November. The value of an average acre of good Iowa farmland soared almost 24 percent from October 2011 to October 2012 .

The Federal Reserve survey found that East Central Iowa, which includes Linn, Johnson and surrounding counties, recorded a 12 percent increase from Oct. 1, 2012, through Jan. 1, 2013, and a 24 percent jump year-over-year, the most of any area of the state.

Northeast Iowa farmland values rose 10 percent in the quarter and 20 percent year-over-year.

A survey of 212 agricultural banks across the Seventh Federal Reserve District found farmland values picking up their pace in the final quarter of 2012.

Concerns about higher federal income and estate taxes  in January when the Bush tax cuts were set to expire led to a higher-than-normal number of farmland auctions in the final three months of 2013, said Kirk Weih, vice president of Hertz Farm Management in Mount Vernon.

"People were making business decisions because of tax policy that was going to change, but it didn't change," Weih said. "Unfortunately making decisions based on tax policy isn't always the most prudent."

The Federal Reserve survey found farmland values rose 7 percent district-wide from Oct. 1 through Jan. 1, and 16 percent from New Year's Day 2012 to the same day in 2013. The district includes Iowa, Illinois, Indiana, Michigan and Wisconsin.

After adjusting for inflation, the district's 14 percent annual increase in agricultural land values was the third largest in 35 years. More specifically, farmland values experienced a cumulative rise of 52 percent over the last two years, matching the fastest gain of the 1970s boom (1974–1976) in real terms.

David Oppedahl, Federal Reserve Bank of Chicago economist, said the most surprising aspect of the 2012 gain in farmland values is that it occurred during the worst Midwest drought since 1988.

"Although by some measures last year's drought was more severe than 1988's, the losses at harvest in 2012 were not as significant as those experienced in 1988," Oppedahl said. "The district's 2012 production decreased 25 percent for corn and 9.4 percent for soybeans from 2011.

"By comparison, district corn yields plummeted by 39 percent and soybean yields plunged 29 percent from 1987 to 1988."

Oppedahl said the drought contributed to crop prices rising substantially last year relative to 2011, so a rebound in production this year could trigger price declines. Even so, respondents to the Federal Reserve survey expect farmland values to continue rising during the current quarter.

Weih, a past president of the Denver, Colo.-based American Society of Farm Managers and Rural Appraisers, said farmland values will have to plateau at some point.

"Long term, over a period of 15 to 25 years, farmland has returned 7 percent to 10 percent appreciation," Weih said. "We have seen 100 percent appreciation in the last five years, and that's not sustainable.

"History tells us very clearly this is not sustainable."