Midwest Agricultural Land Prices: Farm Credit Survey Reveals Key Trends

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[Yeager] Has the value for that land changed recently? What's the reason for the change? Up or down? Depends on where you're at, especially in the Midwest. Is it a crop or pasture situation? We're going to find out. A new survey from Farm Credit Services of America has come out. We're going to break down some of the numbers and the reasons why Tim Koch is going to be our guest. He is the executive vice president of business development for that organization. We'll talk a tiny bit about where he's from. And Beatrice is the town closest to him. That was the big one, but not his hometown. So he'll straighten me up right away when we get started on this installment of the MToM podcast, I'm Paul Yeager. Thank you so much for dialing us up this week. New episodes come out each and every Tuesday on topics that vary to keep you informed about what's happening in rural America. Let's talk land right now. Tim, let's first start with the pronunciation of Beatrice. Do you know what the origin is and why it was called that?

[Tim Koch] I do not.

[Yeager] It's one of those towns. It's like, you know, in Iowa, we have Nevada and things that we can't get right, that look the same, but are different. How many times did you have to create, correct people on your hometowns?

[Koch] I didn't have to correct them. Beatrice isn't really my hometown. That's just the closest town that most people are aware of. So the town I grew up in was actually DeWitt, Nebraska, with a bustling population of 425.

[Yeager] So has that gotten bigger over the years?

[Koch] It has actually gotten smaller. So DeWitt was actually where the Vice Grip locking pliers was, invented it and then produced for a long, long time. And so until Rubbermaid, bought Vice Grip moved it to China. The town was pretty stable. But then, like most small towns, when the jobs went away, as did the population. So I don't even know what it is today. Probably 300, something like that.

[Yeager] Did you have aspirations growing up in DeWitt of doing farming or anything like that?

[Koch] You know, I didn't, my dad owned a construction company, my grandparents, farmed. My uncle was going to end up on the farm at that point in time. He had a small dairy. And so, when he would go on vacation, I got the opportunity to go milk cows. And that, solidified any interest I had in farming.

[Yeager] So that's one way to do it, to solidify. And I know, I know the feeling. What prompted you to get into the business that you're in now with land?

[Koch] Yeah. You know, coming out of college, I was an accounting major. Decided public accounting was not something I had an interest in. My first role out of college was actually as a bank examiner. So in that role, I was headquartered out of Grand Island. Traveled across the western part of Nebraska, different banks every couple of weeks. And as you know, you're well aware, those are ag banks. And so that's kind of what I learned. What I understood. Once my wife and I, you know, got married, started talking about having kids, getting off the road became important to us. And, farm credit seemed like a decent place to continue, that career from a lending standpoint and certainly, an opportunity to continue the ties to agriculture. So that's kind of the math for me.

[Yeager] So that's right about 2000 when you started with the company?

[Koch] Yes, sir. That's correct. February of 1999 actually, but.

[Yeager] Okay, so we're coming out of a couple of challenges on the hog farms at that point where just before the 2001, economy hiccup there, what was what was the landscape like and land at that point?

[Koch] You know, I don't you know, land was still, people could still remember, you know, the 80s from that time frame. So, people were fairly conservative, as I recall. Interest rates were, in more of an uptick trend than they were, flat or down. And, you know, interest rates are one of those drivers of that can impact real estate value. So my recollection is that we were fairly, fairly stable to flat at that point in time.

[Yeager] Has there been, has land, farmland, always kind of, I won't say chased the stock market, but kind of moved in concert with it a little bit.

[Koch] You know, I don't know that I could consider myself a student enough to, to give you the history of what the stock market does. Now, I do think there is a tie. You know, land values loosely follow real estate or. I'm sorry, interest rate. You know, trends as you know, does the the stock market, you know, there's been periods of time where ag real estate has been an alternative investment for people that might be in the stock market. So as we see, people that, you know, want to diversify out of the stock market, ag real estate has during certain periods been a time of that. So I think some could view it as kind of countercyclical, as opposed to really tracking exactly. You know, what that what that does and how it tracks.

[Yeager] I think I'll save my follow up for that once we get into the report, because I am curious about who is buying land now? You know, what things that. But you just had a survey. How often do you do this survey?

[Koch] Yeah. So maybe I'll tell you a little bit about our survey. There's lots of real estate surveys. Ours is a little bit unique in that we have staff appraisers. So twice a year, our appraisers, appraisers is the same farm that they've done for decades. So we have 93 we call them Benchmark Farms. And what that basically means is we've identified farms across the eight state geography that we land in, and we reappraise those to get a sense of what the real estate market is done, what the trends are, how the values have changed. Now, the reason we approach it that way is that it allows us to hold the quality static. So other surveys just take all the real estate sales in the state of Iowa, average them out and see what that has done from a price trend standpoint. Well, in certain periods you got higher quality land selling, lower quality land, and it can create, you know, some noise in what that survey is and what it does. So once again, back to ours, we have our appraisers value those farms every six months. And that's how we identify the trends that we publish when we talk about real estate values.

[Yeager] That sounds very scientific.

[Koch] Well, I don't know if it's scientific, but it's consistent. Over time. Now, I think the other thing that's important for us to understand is there is no exact science and real estate values. You know, we can say that, you know, if you look at the state of Iowa, our data and trends would show that real estate values are softening a little bit. The USDA just recently, reflected their numbers and it shows actually a small increase in value. So I think it's important to understand that, you know, there's a margin of error that's probably plus or minus one or 2 or 3% and that and we really focus on what the trends are doing. Are the trends, you know, stable, flat or moving up or down significantly and in any direction.

[Yeager] And if I read the release correct, this is the second consecutive drop, at least for Iowa.

[Koch] Yeah. In Iowa, we saw a little bigger drop at, in our year end survey. And then June 1st saw a pretty modest decline, just just down a I think a 10th of a percent was our Iowa number.

[Yeager] Anything driving that in particular?

[Koch] No. You know, I think the things that are driving, you know, that real estate value, are the, the three primary things we talk about all the time. We mentioned interest rates being one of them. Supply and demand is another one. And then the other thing is, I'll call it producer sentiment. You know, what's the primary buyers of ag real estate view? The outlook is for agriculture, commodity prices. If we think about the environment we're in right now, the outlooks not great from a commodity price standpoint now, especially if you drive across most parts of Iowa, I understand that maybe some of the rain we've got over the last period of time has changed, some of the outlook, but it looks like we're going to have really good crops, across most of the Midwest, specifically the Western Corn Belt, which is putting pressure on commodity prices. So I don't know that we're, you know, headed into a period of significant decline and, you know, losses. But the outlooks probably not the same today as it was, you know, 2 or 3 years ago coming off of, you know, some really good prices.

[Yeager] Do you get the sense that this is tied more to commodity prices than it is interest rates?

[Koch] I think the environment we're in now, if we call Iowa down to flat from a real estate value trend, I think one of the key drivers there, you know, if we just look at the commodity price outlook, we should probably see much greater softening in real estate values than we've seen. Now, the other dynamic that exists, specifically in Iowa, is we're seeing reduced number of real estate sales. So if we think about a component of any industry and driver of price, it's that supply and demand dynamic. And today there's more willing buyers than there are willing sellers, which is propping up real estate values at a time where interest rates and commodity price outlook would tell us they should be going lower.

[Yeager] All right. Now I'll ask my follow up from a few minutes ago. Who are these buyers?

[Koch] You know, we're seeing most of those buyers continue to be producers. You know, our data would not suggest that we're seeing an influx of buyers that are investors. Now, there's always that segment of it that depends what you call an investor. Right. You know, people from Chicago that are just buying Iowa ag real estate as a source of diversification? That's not what we're seeing now. Somebody who grew up in Iowa on a farm move to Chicago, wants to own a good piece of Iowa real estate. I call those AG informed investors, to an extent. And then the other thing that's really not truly reflected in some of our data, the economy as a whole has been really, really good. And so recreational property continues to be in pretty high demand. And most of that is not, producers. That's more of that investor segment. But to get back to your question, most of the demand, most of the purchases are coming from, from producers.

[Yeager] So it's not the dentists who have come in from whatever convention when they've heard, hey, here's a good deal. That's always I'm sure that's an anecdote you've heard before.

[Koch] Yeah, there's always some of that. But that is not the primary source of buyers that we're seeing at this point in time.

[Yeager] If it is those who already have land and those who are already in the rural area, any idea on the age of the person? Because there was a story going around a couple of years ago, it was somebody who was north of 70 that was still buying land. Are you hearing that or know that?

[Koch] Yeah. Well, what we know is the price of land is higher than what the economic return will allow, you know, to support. So those buying land have to have pretty good financial strength somewhere else, have to have an operation or farm income to supplement the payments on that. If they're not buying it purely with cash. And if you are a cash buyer of real estate, most not all, most 30 year olds don't have, you know, $12,000 an acre of cash laying around to make that purchase of that farm a cash, a cash sale. So we don't track ages of buyers, we don't track demographics. But it does make sense anecdotally, that the buyers who are producers are, later in their career than earlier.

[Yeager] Wow. Okay. Do you track then, the number of those who finance versus those who do pay cash, or at least a good portion of cash on a sale?

[Koch] We don't specifically inquire that, you know, a lot of our sales data that we get comes from realtors from, you know, the courthouse records, and that information's just not there. Now, as we think about our customers who are buying land, you know, we do track that now, obviously those are more skewed towards individuals that are taking on some level of debt at least. But we also hear from, you know, our teammates that are at the sale from our customers who maybe weren't the successful bidder at auction, that that was, you know, Joe, Joe had a bunch of cash. Joe had a 1031 exchange needed to use that. I mean, there's all sorts of reasons, that we hear that, but, there's still a lot of cash that exists and there's still a lot of cash buyers, which is another anecdotal, piece of evidence of what's propping up real estate values, despite what we can see in the in the near term, maybe a period of more stress, reduced commodity prices. The overall financial strength in agriculture is still pretty good. You know, we're coming. You get the seven years of really good times.

[Yeager] Sorry. Do you get the sense then, that the buyers have always been buying or are these new buyers who have maybe weathered the old one, the ‘08 economic storms?

[Koch] They're certainly those that have weathered, you know, the economic storms of, you know, 7 or 8 years ago. But I think they're also those that have been in the market, have been successful, have been buyers for a long, long time. So I don't think it's a new segment of buyers. It's just a continuation of those that have been in the market.

[Yeager] You do have lending as part of your business, right?

[Koch] Yes, sir. Our primary business.

[Yeager] So again I'm asking about land. So you might not want to dip your toe too far into this, but how hesitant are lenders right now, for whatever reason, to look at a farmer and go, yep, go for that. Or no, matter what the purchase is? I mean, are you, is there a little bit of cautiousness? Or Is it cautious optimism or is it optimism?

[Koch] Yeah. I think there's lending. You know, our customers would say there's always a level of cautiousness. But as we think about agriculture, as we think about the long term, I continue to be optimistic about long term agriculture. You know, in the US, I think agricultural producers have weathered some, some tough times. Agriculture always has cyclical periods to it. You know, we're going to go through periods where, the price of corn and soybeans, doesn't match what the cost of what that crop in the and, you know, we continue to and I think producers are smart enough financially savvy enough to understand when they can go buy that farm and when they can't. And, you know, we don't necessarily focus on, you know, how much equity exists in that farm. It's all about what's the cash flow that the overall operation, you know, can support. And that's been, you know, our approach for a long, long time.

[Yeager] And I don't know how much data you keep on sellers, but who are the sellers right now in this market.

[Koch] Yeah. Once again, we don't track that in-depth. But once again, anecdotally, the sellers are those that are, you know, exiting farming. But what we know is agricultural producers are getting old. You know, the average age continues to go up, as producers or owners of real estate pass. And you know, that money or that property transitions to their heirs. A lot of them would rather have the cash and don't want to own, you know, that real estate. So that's another sector of that. I can tell you, we're not seeing that segment of buyers. If we go back to, you know, 20, 20, 2010, 2011, when there was pretty significant stress in agriculture, you know, that was prompting some sales of real estate.

[Koch] We're not in that period now. It's not a a period of stress sales. It's more just normal, turnover. And I think that's why we're seeing less available, you know, supply of real estate on the market than we might typically.

[Yeager] One of the numbers in the report that you had that stood out to me with South Dakota, what was the reason for? And the reason was I think it was grazing. Right. Is that why that land values went up?

[Koch] Yeah. So South Dakota, I'm just, peaking at the number here the last six months. You know, the value of ground in South Dakota was up a little over 5%. If we just looked at the crop ground, that was up a little over 3%. So, you know, the price of cattle, the profitability and ranching, has led to some pretty significant strength in pasture, in grassland. So that was a driver of that. But overall, values in South Dakota, you know, even of crop ground was up a little bit.

[Yeager] And did that move in conjunction with neighboring states, or is this just a laggard on other growth? I mean, like, because I mean, Iowa had, you know, rocketed there for a little while. I mean, was South Dakota doing it at the same time?

[Koch] Yeah. Iowa almost always leads the market in the Midwest on the way up and also on the way down, right. Iowa, has bigger tends to have bigger swing. South Dakota, a little more muted. You know, I think the other thing that we're still seeing in South Dakota is, you know, this change in weather patterns is creating a better environment to raise, you know, corn and soybeans in the state of South Dakota, if we go back 15 or 20 years, there's a lot more small grains. Small grains don't provide the same economic impact as what, you know, corn and soybeans were. So South Dakota, is still, you know, once again, it moves a little slower. And I think it's still seeing some favorability from growing conditions in the commodity mix. That can be part of that state as well.

[Yeager] What about the state you're located in Nebraska, in your home state? What's happening there?

[Koch] Yeah. Our data would show that Nebraska is flat to down a little bit. Now once again, as you think about, you know, your listeners might hear a different story. I just read an article last night. The University of Nebraska put out their number, and they showed that Nebraska real estate values were up again. Once again, it depends on how you track that. What survey you do and what that is. But, I think for the most part, what we're seeing in Nebraska is real estate values are flat to probably trending down. And I would anticipate if we have the similar conversation, 6 or 12 months from now, we'll continue to see that downward pressure, just based on economics.

[Yeager] Again, I don't know everything here about the landscape of every farm in Nebraska or South Dakota. But Nebraska raises a lot of cattle, but they're in feedlots a lot. The pasture isn't, I mean, there's still a ton of pasture land, but is that factor at all into Nebraska's number?

[Koch] Yeah, there's a lot of ranch land in western Nebraska. You know, feed yards are, you know, kind of scattered throughout the state. I don't know that the recent profitability and fed cattle is driving, you know, real estate values, with the exception of, there's still a lot of feed yards and cattle feeders that own a lot of real estate and grow a lot of their corn. So they would certainly be in the market to do that. But the other thing, you know, cattle feeders also understand the cyclicality of that business. And, it's at least as cyclical as, as, as real crop production.

[Yeager] Some would say more and some would say more dramatic and can really get wobbly at times too.

[Koch] Yeah. You know, it'll be interesting to see one of the dynamics as we see a, compression in, you know, the price of corn, in Iowa, there's usually farmer feeders that spring up and decide they should, you know, walk that corn off of the farm instead of, you know, sending it to the, to the elevator. The co-op or the ethanol plant. It'll be interesting to see what that dynamic is, because, at least from my perspective, the risk in feeding cattle today has never been higher with the cost of feeder cattle, and the rest of the input cost. But, everybody has a different mechanism in which they sell their commodities.

[Yeager] And a different tolerance for risk.

[Koch] Absolutely.

[Yeager] Speaking of range and pastures, Wyoming also had a bump. Same reason?

[Koch] I think that's very, largely aligned to the, improved economics of, of ranching, cow calf, operations. Now, it's probably not the impact you would see if you look at the pure profitability and, ranching, cow calf operations, you would probably expect real estate values to be up much more dramatically. Certainly the ability and the economics based on today's environment is there to, to bid more. But a couple of dynamics. First of all, we are not seeing the cow herd, you know, rebuilding. So, you know, rancher, are not holding back heifers at this point in time. So the need for additional grassland just isn't there. And so, while you would think the pure economics would, would drive that higher, seeing a much more muted response while it is, you know, providing sport support in that little bump we have seen.

[Yeager] Tim, you have other states. I think you said eight. What were some of the other states and consistent with what you've been talking about?

[Koch] Yep. So, North Dakota, Minnesota, Kansas, they would all be showing a very similar trend. You know, Minnesota and North Dakota are seeing, you know, that up a little bit very consistent with the trends we would see in South Dakota as well. We track real estate values in the eastern third of Kansas. And once again, that's a fairly even split between crop production, but very different types of crop production from the north, northern part of Kansas looks a lot more like Kansas and Nebraska to the southern part of Kansas. That's, you know, they're able to double crop, some crops there. And then you've got the Flint Hills, and, and grass areas, you know, through the middle of the state, which is seeing really strong improvement in prices as well. But that's a much more of a supply, situation that just doesn't, doesn't change hands very often.

[Yeager] So no one likes to see prices go lower unless you're the one trying to buy. Yeah. I'm not saying it's a correction because it's not definition wise, but a little steam coming out of the market overall for land. Is this a good thing, a bad thing?

[Koch] Yeah. You know, I think it's a healthy thing. Something that just continually goes straight up, starts to bring a different type of buyer into the market. You know, if we think about the last time, you know, real estate values, you know, went on a tear from 2011 to 13, we started to see a lot of investors coming into the market. Everybody assumed that, well, with ag real estate, you can get a, you know, five or 6 or 7, 10% return every single year. And that's just not realistic that that's going to happen. So, you know, leveling off, showing some level of maybe moderation, I think is a healthy thing, for ag real estate. But once again, the buyers of ag real estate today, are not looking at this as a short term investment. And, you know, quite honestly, probably don't care what the value does after they buy. You know, I, I was having a conversation with the producer a couple of weeks back and, you know, we were talking about the, you know, tremendous amount of wealth that's been built in agriculture based on real estate, but it's really the cash flow that is generated off of that wealth. And if you're talking about a one or a two or maybe a 3-4 percent return, that's not the same and it doesn't really matter. You know what that's worth. So, you know, the buyers of today are not buying it based on the assumption they're going to sell that in the next 2 or 3 years. And that's why price doesn't have as much of an impact on driving those buying behaviors. Does it fit in my operation? Can I cash flow that? What's it do to my overall cost of production? Those are the buying decisions that I think are being made today.

[Yeager] I can't believe I'm going to use this phrase, but is that different than it was at the turn of the century when we started our careers? Tim.

[Koch] I don't think so. I think it was. I think it was the second, I think the tools people had, have continued to evolve, you know, interest rate opportunities to lock in periods of low rates, to, to refinance, to adjust those cash flows. You know, crop insurance has continued to evolve in its structure and format and really provide more stability to that producer. You know, there's not a lot of professions that provide a greater amount of volatility to the overall earnings stream than what agriculture does. And that can be, certainly a challenging, component of that. But as I said, with some of the new crop insurance products, the ability to hedge your production, understand, you know, price risk management, I think it's created more stability and has also propped up real estate values as well. We don't have the same level of fluctuation in profits and losses that we had. You know, 25, 30 years ago.

[Yeager] And I don't think this is what you've been saying, but it's going to take more than just low commodity prices to maybe wobble that confidence that you have in the market.

[Koch] You know, I think so, you know, coming out of 2013, 2014, you know, we saw real estate values come down. But, you know, they had run very significantly and they came down a little bit. You know, we were flat from 2014 to 2020. And now we're taking another leg up. Would I be at all surprised if we don't see those prices, maybe especially in Iowa, come off, you know, maybe ten, 15% over, a couple year window? Oh, I wouldn't be surprised, depending on what commodity prices do. But I don't think we're going to retrench back to those, you know, those prices we've seen. I mean, we, that's probably not where we're headed.

[Yeager] I'm going to just play with your scenario there. If that percent goes off the market, that would then probably, I'm guessing, attract a new round of buyers because they would see an opportunity then and that would just send us back on that ride.

[Koch] It certainly may. I mean, that's the, you know, the economics of real estate is, what's my return, what's the value that it's worth to me? And you probably bring a little more of that investor market into play if we see a bigger drop in, you know, as we were thinking about the drop that happened coming out of 2013 and 2014, you know, as a lender, we're focused on where where's that floor? What does that look like? How far could this drop? And I think the investor market does provide some level of artificial floor. I mean there is a point where money comes into real estate because it's now viewed as a good alternative investment, not as a producer, but just as a pure return play and stability. I don't know what that level is. Maybe it's a 4 or 5% annual return with some stability and diversification might be where that market comes in.

[Yeager] You sound like one of our commodity market analysts. When the outside money, everybody talks about the managed money or the funds or the out the outside money is what's driven up the cost of corn and beans and wheat. It's done. The same thing to land is what it sounds like you're telling me.

[Koch] Probably to a lesser extent. And, it, it, it comes in at different periods of time. So I, I don't believe outside money is a driver of the increase we've seen over the last 2 or 3 years. But it has come in and supported and been part of that at different times. This leg up in the market, I feel pretty confident and saying has been driven by agricultural producers. The amount of profitability that they've seen the last 3 or 4 years and the desire to continue to own real estate. And they can control.

[Yeager] I'm not sure. Tim, do you follow rents at all in this scenario? And has that changed your outlook, or is there any correlation?

[Koch] Yeah, there's certainly correlation to rents. Rents typically lag up and lag down from a value standpoint. So, you know, rents are generally been flat, but we do anticipate we'll see a little downward pressure on rental rates as well. Once again, you know, the Iowa market, you know, we started, we start to see some rents that, you know, start with a for, those those start to, feel a little, a little on the high end of that. But I do anticipate that we'll see as rents are renegotiated for 2026, we'll probably see some downward pressure, much more than upward pressure, assuming commodity prices stay where they are. And the forecast looks similar.

[Yeager] I'm not going to go out on a limb here and say it, Tim, but I'm guessing the producer would rather see the four in the front of the corn. Not in front of the rental rate.

[Koch] I think that's a very safe, very safe assumption.

[Yeager] All right, Tim, thank you so much. I appreciate your time.

[Koch] Sure glad to do it.

[Yeager] My thanks to Tim Koch and to you. Subscribe wherever you get your podcast, leave a comment, rate a review. I think I'm supposed to say that every time that's required. If you have a podcast, thanks for watching or listening. We'll see you next time.

Contact: paul.yeager@iowapbs.org