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LORANDA GROUP: KEY FACTORS UNDERLYING 2012 FARMLAND PRICES, SALES
Source: Loranda Group

I recently attended the annual Land Investment Expo in Des Moines, Iowa and listened to an interesting presentation by Jim Knuth, Senior Vice President of Farm Credit Services.

Because it has so many local lending offices, Farm Credit has the ability to collect and analyze an incredible amount of land sale data.

The discussion included some general information, e.g., land values in IA have increased 34% the past 12 months, along with some more obscure (though important) statistics, some of which may explain how we've arrived at these current price levels. To wit...

1. In 2006, there were 6207 real estate sales in the territory serviced by the Farm Credit Services of America district (IA, SD, WY, NE). In 2011, the number dropped to 4434 sales, confirming that there is a lot less land available to buy.

2. In 2009, the debt to asset ratio for district borrowers was 35%. In 2011, the ratio actually dropped to 34% despite higher land prices. In addition, the loan to collateral value over the same period dropped from 54% to 48%. This confirms that the balance sheets for farmers continue to improve.

3. In 2008, farmers purchased 82% of the IA farms that closed. This number dropped to 73% in 2011, thus indicating that investors are continuing to purchase land despite the higher prices.

4. In 2009, 29% of the land sold at public auction while in 2011 this percentage increased to 50%. Not coincidentally, most of the record sale prices have occurred at auction, as there are a number of aggressive buyers in the market looking to add to their land holdings.

I look at the underlying land issues listed above, and am more convinced that this rapid increase in farmland values has been driven by profits and not speculation. At some point, prices will stabilize and there may be a period where the market experiences a short-term correction. I just can't buy into the "bubble is ready to burst at anytime" scenario that a few economists are still predicting.


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