There is a common saying in selling real estate (well, selling anything really) that goes something like this:
“Something is only worth what someone else is willing to pay for it at the time you wish to sell it.”
There is a lot of truth to that, but of course MANY factors will ultimately drive what that price will be that someone else is willing to pay. In this multi-part blog series, we’ll cover some of the largest drivers of ag land values. We’ll also provide some context to our local Southern Red River Valley land market and how it relates to these factors. Let’s continue!
Read Part 1: Soils
Read Part 2: Drainage
Read Part 3: Size & Shape
Part 4: Status of the Market
This one seems obvious but it is worth discussing. Like any market, the ag land market goes in swings. Land prices go up, and land prices go down. The extent to which those swings occur can change gradually or quite rapidly. The changes in the market are generally driven by global (macro) and local (micro) forces. Some of these forces have a slower, lagging effect while others can lead to quicker turns in the land value market. It is important for sellers to understand what type of a market they are in when they are ready to sell, as it may have an impact in either how the land is sold or even in their decision to sell at all. First, let’s cover some of the primary macro and micro forces that impact ag land values:
- Commodity prices: The price of the products we produce here in the Red River Valley of North Dakota and Minnesota can have a large impact on ag land prices. Commodity prices on their own have a HUGE number of factors that influence them of course, but it’s easy to understand why when times are good and prices are high, land values rise. When times are tougher, and there is no question that right now we are in one of those periods, land values will fall.
- Interest rates: As rates go up (which is the recent trend), prices tend to go down because as the cost of capital to finance land increases, it becomes more expensive to buy land. To a smaller degree, it also causes investors to lose interest because higher interest rates tend to increase returns on other investments that make farm land less attractive to them.
- National/Global Policy: Policy decisions or regulations at the national or even global stage can have impacts in agriculture that can lead to changes in ag land values. Global trade ties into this as well as the easier or harder it is to move product around the globe, you could see eventual changes to land values.
- Demand & Consumption: If worldwide demand and consumption for the products we produce increases or decreases, those shifts will impact the entire ag sector. Naturally that will eventually have an impact on the value of the land raising those products.
- Taxes: Are taxes for farm land high, are they low, are they increasing, or are they decreasing? Taxes can play a large part for some buyers in how much they will value the land (especially the investor buyer). For example, currently taxes on the Minnesota side of the Red River can be quite a bit higher than the North Dakota side. Investors may not be able to get a high enough rent to cover the difference in taxes, so they will likely value the Minnesota land lower than the same type of ground just across the river.
- Weather/Water: If you are in an area with prolonged droughts or persistent flooding, the value of your land could be weighed down as a result. Weather can also be a MACRO force if there is widespread disasters in other countries or areas which may lead to crop shortages, although these isolated types of events do not have a big impact on farm land values.
- Future development potential: Does your farm land sit in close proximity from a major city or growing community, and if so is the growth path headed your way? If so, your land value will be higher than farm land well outside the path of the city, sometimes by a factor of 2 to 5 times as much as traditional farm land.
- Market Influencers: This one is a bit broad, but locally there are always some miscellaneous factors that can heavily influence the value of land. For example, there may be one or two VERY aggressive, well-heeled buyers in the local market trying to buy up land, and driving up prices. Or perhaps there is a buyer that others in the local market want to keep OUT so they will bid up land just to keep it out of their hands. Maybe your market has a higher than average number of investors or people with 1031 money, which puts more upward pressure on land prices as well.
Of course there are many other global and local factors that can impact the value of ag land, and some of them are changing rapidly. How quickly land values adjust to these influences can vary widely, but we know with time these forces and more will drive values higher or lower.
Commodity prices have been low for some time which has been a big reason for the decline in ag land values since their highs in 2012/2013. As farm land values have dropped, so too has the sales volume of land. It stands to reason that as land values go lower, owners tend to hang on longer hoping the prices rebound and they can capture a higher profit. While the supply of available farm land has been lower in recent years in the Red River Valley, demand still seems to be pretty strong which has helped prices from declining further it seems. In the local market TODAY, we see ag land values holding fairly steady and maybe even increasing in some areas, such as Cass County (read more about what land values did there in 2017).
Only time will tell if the current market forces will lead land higher or lower, but we still believe now is a good time for both buyers and sellers of farm land in the Valley. Feel free to contact us if you agree and could use some help!
Until next time,
Part 1: Soils
Part 2: Drainage
Part 3: Size & Shape