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April 7, 2006 North Dakota Cropland Values Continue Rapid Rise A recent survey indicates that North Dakota cropland values increased about 10 percent in the last year. This follows increases of 11 and 7 percent in previous years. These are the three largest annual increases since 1979 and have increased average land values to roughly $500, $550 and $600 in three successive years, eclipsing the previous high of $530 set in 1981. “Although last year’s increase indicates a very strong land market, it is the first time in seven years that values have not increased at an accelerating rate,” says Andrew Swenson, North Dakota State University Extension Service farm and family resource management specialist. “Cropland rents also increased, but at a much lower rate.” Swenson bases his calculations on surveys conducted in January by the North Dakota Agricultural Statistics Service. There were very strong increases in land values across the southern half of the state. The southwest and southwest-central regions had increases of 13.5 percent to $427 and $475 per acre, respectively. The southeast and southern Red River Valley had increases of nearly 16 percent to $691 and $1,320 per acre, respectively. Land values were not as strong in the northern half of the state, although the northeast- central region increased 10 percent to $550 per acre and the northwest-central region crop land value increased 6.5 percent to $507 per acre. Land values essentially were flat in the northwest region at $392 per acre. Land values actually decreased 2 percent in the northern Red River Valley to $924, but this region had the highest increase, 26 percent, the previous year. Swenson cautions that the values are averages for large, multicounty regions. Land values vary considerably within a region. Crop land rents increased at a much lower rate, 2 percent statewide, than land values. However, as with land values, the southern half of the state had greater increases than the northern half. The largest increase was nearly 5 percent to $26.20 in the southwest region. Rents elsewhere in the southern half of the state increased between 3 percent and 4 percent. Average crop land rents in the southwest-central, southeast-central and southern Red River Valley regions were $30.40, $40.90 and $64.40 per acre, respectively. Cash rents were nearly unchanged in the northwest ($26.60) and northwest-central ($34.60), but increased 2.7 percent in the northeast-central to $35.30 and dropped nearly 4 percent in the northern Red River Valley to $51.20 per acre. The stronger land value trend in the southern regions, compared with the northern regions, can be explained in part by better cropping and hunting alternatives due to climate. “This could be referred to as the soybean and pheasant factor,” Swenson says. “Also, excess moisture has hindered crop production in parts of the north. Another important factor is the adoption of no-till technology, particularly in the southern regions outside the Red River Valley, has improved moisture conservation and profitability.” Swenson expects higher land values next year, but at a slower pace. The land market has a strong head of steam and the increase of nonfarmer investors, often with section 1031 exchange dollars, has brought more cash to the market than existed in the past. With three years of strong annual appreciation, there is some speculative fervor, and after adjusting for inflation, current land values are still less than half of their peak. The crop land value of 1979, adjusted to 2006 dollars, would be more than $1,300 per acre. Swenson believes the rate of increase in land values may moderate because of rents and interest rates. “Simply put, land rents are driven by the profitability of farming the land,” Swenson says. “Profitability, and therefore rents, has not kept pace with land values. During the past three years, rents have increased at an average annual rate of 2 percent, compared with 9 percent for land values. This has reduced the land rent to land value ratio to levels approaching that of the early 80s, prior to a collapse in land values. A wild card in land values next year will be crop yields and commodity prices in 2006. Production costs are the highest in history, so strong crop gross revenue is a necessity. Otherwise, producers increasingly will become unwilling or unable to bid up land rents or values.” Interest rates have been increasing. This reduces the profitability and the ability to pay rents for producers who must borrow money for operating inputs. It also reduces the profitability for those who invest in land using borrowed capital. A current scenario is to pay 8 percent interest for money to purchase land that generates a 5 percent return from rent (after real estate taxes). “That is a losing proposition, unless, of course, there is land value appreciation of 3 percent or more,” Swenson says. “In recent years, rents plus appreciation have been providing very generous returns to those owning land. However, if the land rent to land value ratio continues to diminish, the cost of borrowing money increases and rates of return on alternative investments, such as bank CDs, increase, it will be more difficult to maintain investor demand for land and expectations of future appreciation.” ### Source: Andrew
Swenson, (701) 231-7379, aswenson@ndsuext.nodak.edu
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