Record Land Prices Continue

January 31, 2012

For many farmers and ranchers, 2011 was the best year they have ever experienced in agriculture. Reck Agri Realty & Auction continues to witness record land values. Since the July 2011 issue of “LAND NEWS”, we have successfully conducted 11 auctions and 3 private treaty sales representing 16,513 acres for more than $15,992,000. Please review the SUMMARY OF SALES for the pertinent facts of each sale. We continue to see increasing values with CRP, dryland, and pivot-irrigated land while grassland values remaining constant.

How long will this boom last and what’s fueling it? These are the two big questions everyone is asking. With increased returns to the owner/operator and the absentee landowner via higher commodity prices, cash rents, etc, where else can you invest your money and receive a competitive return? The same reason landowners are reluctant to sell is the same reason buyers are wanting to purchase land: where to invest cash if we have it? Agricultural property is one of the most attractive investments currently available.

Unless you, as a landowner, do not need to sell, other than to pay off debt, settle an estate, and/or dissolve a partnership or corporation, there’s little incentive to sell. However, if you think the time may be right to cash out of your real estate assets, there really has been no better time to do so. Buyers who have available cash, armed with low interest rates, are aggressively hunting for the limited number of properties for sale. There are many such buyers out there and they are fueling record land prices and a strong seller’s market.

So, when will the bubble burst (like in the 1980’s) and how long will record values continue?

First, it is my opinion we will not see another period like the 1980’s in the foreseeable future. In the 1980’s, land was being purchased by borrowing on appreciation and double digit interest rates. It was pure speculation. In today’s market, more than 60% of our sales are cash. If someone borrows, there is a higher down payment and long-term interest rates on borrowing are very low. Many buyers are dollar-cost-averaging their purchase within the land they already own.

Second, the length of the current ag real estate boom depends on the following: 1.) How long low interest rates continue. Higher rates equal higher borrowing costs and alternative, safe places to plant cash and get a return; 2.)Ag profitability – dependent upon yields and commodity prices; and 3.) The global and US political climate.

It is my professional opinion that we will continue to see record prices for a while with factors such as location of LAND NEWS TRI-STATE LAND OWNERS RECORD LAND VALUES the land, its quality, who neighbors the property, and the buyer mix playing a big factor in the actual selling price of individual parcels of property. Interest rates will continue to be low (perhaps not super-low as now, but still low) unless the specter of inflation shows its ugly head – something that’s unlikely given the current inflation rate of 3.0 %, down from a few months ago.

But, be warned. There are some headwinds which make planning difficult that might directly impact agriculture, tax and estate planning, and land prices over the coming years.

Unless the US Congress takes action before the end of 2012, the following will occur: expiration of the Bush tax cut and therefore the unified federal gift and estate tax exemption will drop back from $5 million to $1 billion, the maximum federal estate tax rate will increase from 35% to 55%, the 15% capital gains tax rate expires, and beginning in 2013, an additional 3.8% Medicare tax on investment income from interest, dividends, annuities, royalties, capital gains, and rents for individuals who earn more than $200,000 annually and $250,000 jointly. With the uncertainty of what 2013 will bring, it is difficult to initiate estate and tax planning and is tough to gauge the impact these, and other, tax “increases” will have on your investments, agriculture, overall economy, and land prices. But it can’t be good.

Also, clearly, the results of the November 2012 elections and the direction of the newly elected administration and Congress could greatly affect our economy and future decisions.

In summary, currently we have a perfect storm for a bullish seller’s market with no idea of the time line when the land market will soften. The hardest decision is making the decision if and when to sell. To take advantage of this current bullish seller’s market and you would like to sell, we have two main sales seasons. The first being from September to December, with landowners pushing to sell by the end of the year. As shown in the summary of sales and as a result of the subject of this article, we have sold the majority of properties we offered for sale from July 2011 to December 2011. Our second main sales season is underway and lasts until May (after which farmers and ranchers get busier). If you are interested in selling your property and want to be included in this 2012 sale season (knowing what the tax consequences are), we welcome your calls.