Broker Pat Karst thought the farm being auctioned late last month would be scooped up. The 98-acre plot was of decent quality, and the volunteer fire station in Arlington, Ind., where his firm was holding the sale, was packed with farmers.
Instead, the evening ended with the latest in a spate of failed auctions, after the top bidder dropped out far below the asking price. “The moral of the story is: unrealistic expectations from sellers and more caution on the side of the buyer,” said Mr. Karst, who acknowledged he, too, thought the property would fetch a higher price than offered.
The flop reflects a broader turning point in one of the U.S.’s biggest recent asset booms. From 2009 to mid-2013, average prices for agricultural land in the U.S. rose by half, while in Iowa, Nebraska and some other Midwest farm states, prices more than doubled, according to U.S. Department of Agriculture data from last August. That helped fuel economic prosperity across the Farm Belt while stoking fears about a possible bubble.
Now there is mounting evidence the boom is fizzling out. Farmland prices in Iowa fell 3% over the second half of last year, and those in Nebraska fell 1%, according to estimates from the Farm Credit Services of America, an Omaha, Neb., lender that calculates weighted averages based on land quality. Reports from U.S. Federal Reserve Banks across the Midwest late last year showed prices flattening or slipping from the previous quarter. A monthly survey of Midwestern lenders by Omaha-based Creighton University in January found the outlook for farmland and ranchland prices was the weakest in more than four years.
Despite the falling property values, agricultural analysts say a repeat of past farm-belt collapses is unlikely. Farmer income is expected to remain strong and debt levels are low, according to USDA figures.
But prices have plunged for corn, a key U.S. crop. After rising to all-time highs in 2012—driven by growing demand and tight supply because of a historic drought—prices for the biggest U.S. crop dropped 40% last year, thanks to a record harvest of 14 billion bushels. The Federal Reserve warned in January that corn prices, then around $4.28 a bushel, won’t cover farmers’ anticipated cost of raising the crop this year. Prices have since climbed to about $4.40 a bushel, compared with about $8.31 in August 2012.
Soybeans, the nation’s No. 2 crop, have also lost value. Meanwhile, with the Fed scaling back its stimulus efforts, buyers of U.S. farmland face the prospect of higher interest rates after years of cheap borrowing.
The shifts have forced farmers to recalculate the value of productive land. Greg Plunk, a third-generation Illinois farmer who added 80 acres to his farm over the past two years, said he would be more careful with further purchases. “Profits will be tighter, there’s not going to be near the returns, and guys will have to be careful how much expenses they’ve got into an acre,” said Mr. Plunk, 53 years old.
Falling land prices could cause economic ripples, curbing farmers’ ability to borrow money to buy new acreage, crop supplies or machinery. Land secures many of those loans. Mark Jensen, chief risk officer at Farm Credit Services of America, said half of its $20 billion portfolio consists of real-estate loans secured by farmland. As credit quality deteriorates, farmers will use more land as collateral, he said.
A pullback in farmers’ spending could curtail construction of grain bins and livestock facilities as well as purchases of new machinery. Tractor company Deere & Co. predicted Wednesday that sales of farm equipment in the U.S. and Canada this year would decline 5% to 10% from 2013.
The farmland boom began roughly a decade ago. Prices slumped briefly in 2009, amid the recession, then rebounded, thanks in part to historically low interest rates. Overall, values of some fertile Midwestern land nearly tripled over the past decade.
The recent turn has been abrupt. “There was lots of land around here selling for close to $10,000 an acre, but it’s tapered off quickly,” said Kevin Kremer, 56, an Indiana farmer who recently won a tract of land for roughly $8,800 an acre at an auction in Burnettsville, Ind.
Winter is typically the busiest time in the county-fairground buildings and American Legion halls where fast-talking auctioneers deal swaths of land. But this season has seen a growing number of “no sale” auctions. After the unsuccessful 98-acre auction by Mr. Karst last month, the land sold a week later for $880,000, about 10% less than what the sellers wanted.
In Iowa, the biggest corn and soybean-producing state, 6.7% of farmland auctions failed in 2013, more than double the 2012 percentage, according to Farm Credit Services of America. The total number of auctions fell 30%.
As land prices were soaring, some economists and lenders raised alarms. The Federal Advisory Council, a group of 12 banking leaders that advises the Fed, wrote a year ago that farmland prices were “veering further from what makes sense from a production standpoint,” amounting to “a bubble resulting from persistently low interest rates.” The same group noted this past December that “prices are flat and may be receding.”
So far, the sputtering growth is prompting more caution than panic. But economists are watching closely. “The question is, if there’s a fall, how fast the fall happens,” said Nathan Kauffman, Omaha branch executive of the Federal Reserve Bank of Kansas City, who tracks farmland prices.
The economic picture in the Farm Belt is expected to worsen. The USDA forecast Tuesday that U.S. farm incomes will dive 27% this year from 2013, to $95.8 billion, which would be the lowest level since 2010. Last year’s total was the highest since 1973 on an inflation-adjusted basis, but the continued slump in grain prices is expected to this year outweigh the benefits of having more corn and soybeans to sell. Still, even with the expected decline, the USDA reckons incomes will remain $8 billion above the previous 10-year average.
Michael Duffy, professor of economics at Iowa State University in Ames, Iowa, projects lower income for farmers could drive the price of farmland down 20% to 25% over the next several years.
Other observers point to factors that could cushion or reverse the market decline, including an unexpected resurgence in the price of corn and soybeans. Some buyers say they are waiting to pounce if prices fall, which also could help keep any decline from turning into a rout.
“We think this next 12 months is going to be the best window we’ve had in the past five years” to invest in farmland, said Greyson Colvin, managing partner at investment manager Colvin & Co., which owns about 7,000 acres of farmland.
Adding comfort, today’s agricultural sector looks markedly different than it did during the last farmland bust, in the early 1980s. Then, a roughly 50% drop in land values and rising interest rates led to high levels of debt when viewed as a percentage of farmers’ assets. That forced many farmers out of business and spurred failures among dozens of agricultural lenders. Farmers’ debt-to-asset ratio is currently estimated at 10.3%, less than half what it was in 1985, according to the USDA.
But a sharp fall in property prices could affect a farmer’s balance sheet, said Mr. Kauffman, the economist. “If land values do drop, that could have some important implications for solvency.”Write to Jacob Bunge at email@example.com Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved