farmland prices: what happened in 2018?
by Mason Spurgeon, General Certified Real Estate Appraiser
At the end of December 2018, I completed two farm appraisals on properties in Brown County, Illinois, that I had appraised previously in 2016. One of the properties was over 80% tillable while the other property was more of a recreational tract, less than 40% open. After completing the reports, I looked back to see how much the values hand changed. The differences in value were shocking. They had only declined in value between 2.6% and 3% over the past two years. This is not a large decline in value and could be attributed to any of three factors.
(1) Difference in Comparable Sales Data: I have always said that an appraisal is only as good as the data used, and this could have been the case for the small decline. As appraisers we do our best to estimate the value of a property using the best market sales we have available from the area. The sales data used in my farm appraisal reports could have been more like the subject in one year and slightly different in the other. This is a matter of opinion and is difficult to quantify. Also, the total number of comparable sales could have been different. There were limited sales in late 2015 and early 2016, but more sales in 2018.
(2) Commodity Prices: We often hear that commodity prices are falling. However, according to the chart below from macrotrends.net, the price of corn was on the rise in 2018. While the prices are nowhere near the prices of 2011 and 2012, they are currently on an upward tick. The change from 2016 to 2018 was upwards by about 6.5%, but everywhere you turn someone is talking about the falling commodity prices. This may be a good indicator that popular opinion can be contrary to factual data.
(3) Interest Rates: Again, we hear about interest rates on the rise. While this is true, they are not jumping to the extremes of the 1980s—but they are still jumping. As you can see from the graph below from macrotrends.net, the 30-year fixed rates have fluctuated over the past five years. In January of 2016 the average rate was 3.79%, and in December of 2018 the average rate was 4.55%. This is an increase of about 20%. While this appears to be a larger change in the interest rates on a percentage basis, it is still much lower than the 10-18% interest that was seen in the 1980s.
While I still don’t know the exact reason for the small decrease I noted in my appraisals, it is evident that uncertainty in the market is a driving force. Farmers still appear willing to pay a premium for higher end farms, while marginal farms appear to have held steady or declined somewhat in their prices. This is evident from the farm sales that were seen at the end of 2018.
In conclusion, I still have not seen the large drop in land prices that everyone in the real estate world has been predicting. Sure, there are sales of properties that have sold at the upper end of the market and the lower end of the market, but nothing out of the ordinary. Overall, the market appears to be holding steady and land is still a great long-term investment.