Several years ago, Kansas auctioneer Joe Biggs could tell you who would attend a local land sale, identify the last two bidders and probably even predict within $25/acre what the land would bring. Not anymore.

“Now you have no idea because the buyers come from all over,” says Biggs, who's been selling grass tracts in Kansas' Flint Hills region for 24 years.

Farmers and ranchers still make the majority of agricultural land purchases nationwide. But prices are increasingly driven by urbanites — from sellers of apartment buildings seeking to defer capital gain taxes through “like-kind exchanges” and people seeking recreational property, to deep-pocketed investors turned off by the stock market.

“All those people are bigger players right now than the farmer,” says Biggs, located in Waverly, some 80 miles southwest of Kansas City.

The price of Flint Hills' pastureland has more than doubled from $400/acre five years ago to $850/acre today. An October auction of the 4,081-acre Rogler Ranch in Chase County could set a new high.

USDA changes its tune

Even USDA has found itself scrambling to keep up with the streaking land market. Last year, the agency reported pasture values rose 9.5% in 2004, but USDA statisticians recently abandoned their estimates and now figure pasture values jumped 29% to an average $820/acre in 2004, and another 22% to $1,000/acre last year.

“There's been a change in the paradigm of our thinking on land values,” says Jim Williams, co-head of National Agricultural Statistics Service's annual land values report. “In agriculture, we tend to be conservative and only look at an object in terms of what we consider to be its current use. What's taken place in land values is investors have stepped in.”

Based on the average cash-rent rate of $10.80/acre reported by USDA, pastureland is now selling at 93 times rent. That's a rich multiple, considering investors are paying 17 times earnings for companies in the Standard & Poor's 500 Stock Index.

Williams doesn't believe the relationship between land values and rent rates has become permanently decoupled.

“There's still going to be a relationship but it will be stretched out compared to where it's historically been,” he says. “Ag use value will still create a floor.”

One consequence of the rise of investors is property generally moving into stronger hands. “The financial position of the buyer often exceeds that of the seller,” says Brian Landis, an appraiser with Frontier Farm Credit in Emporia, KS.

Pastureland's “big mo”

And though buyer demand for cropland appears to be easing in some regions, recent surveys suggest the price momentum for pastureland appears to have accelerated, especially in Texas — the country's biggest cattle pasture market. After rising an estimated 24% to $1,080/acre in calendar year 2005, ranchland values are up 28% for the 12 months through June, according to the Federal Reserve.

Tax-deferred exchange buyers from Florida and California have become active buyers of rural Texas tracts in the last eight months, notes Charles Gilliland, a Texas A&M University research economist and rural land specialist.

In addition, high oil prices and the upheaval during the 2005 hurricane season have spawned renewed drilling interest in low-risk, stable-energy areas. That's benefiting rural landowners in Texas, Colorado and other western states, as well as in Pennsylvania, West Virginia and even Arkansas. Oil and gas lease rates have spiked in recent months, and the prospect of royalty payments is welcome news for ranchers (see sidebar, “Cash rents soften,” on page 32).

Pasture values also continued to rise at a double-digit pace through June across northern Wisconsin, southern New Mexico, Montana and western Missouri, North Dakota and Oklahoma, according to the Federal Reserve.

Buyer demand appears strongest for recreational properties and less productive tracts with wildlife habitat. Some observers believe the downturn in the housing market will send even more non-farm money into the rural land market.

Regional aberrations

There are a few signs pasture gains are easing regionally, especially in drought-stricken Nebraska and the Mountain States, where values posted year-over-year gains of 2.8% and 6.7% through June, respectively, according to the Federal Reserve.

Though no one expects a land crash, some regions could eventually see moderate contractions, especially if declining farm profits send farmers to the sidelines.

The farm sector's financial strength is softening: loan payment rates across the Midwest and Plains States are dropping, and requests for renewals and extensions are rising, according to Federal Reserve reports.

Frontier Farm Credit's Landis sees a lot of uncertainty ahead: “This market hasn't yet digested higher interest rates and higher energy costs,” he says. “I hadn't thought we would be able to continue this level of strength in the rural market for as long as we have.”

Indeed, the biggest driver behind buyer demand is a bet that land will continue on its upward tear.

“All markets are cyclical,” Landis cautions. “I have no reason to think this market is different from others. The music will stop at some point, and somebody will probably take a hickey.”

Mike Fritz, owner of Mercator Research LLC, in Monona, WI, is editor and publisher of Farmland Investor Letter®, a monthly subscription newsletter providing farmland market insight and intelligence for farmland investors and managers. He can be reached at m_fritz@charter.net or visit www.farmlandinvestorletter.com.

Cash rents soften

Cash rents for this year's pasture season rose an average 5% nationally to $10.80/acre, according to USDA. That's a notable flattening from last year's 7.3% average increase.

Some of this softness could be due to the slow rebound in the cattle cycle. Beef-cow numbers were up less than 1% for the year ended July 1, with beef-replacement heifers unchanged.

The extended drought across the Central and Southern Plains forced ranchers to cull herds and cut stocking rates. Parched conditions in Nebraska alone cost an estimated $193 million in reduced grazing capacity. Most calves in the state's Panhandle region came off pasture Aug. 1, reports Gary Greder of United Farm & Ranch Management in North Platte.

“There's just nothing out there to sustain them,” adds Greder, who trimmed stocking rates on the 35,000 acres of range he manages from 10 acres/cow-calf unit to 13- 15 acres.

The surge in energy prices has prompted a flurry of oil and gas exploration activity in many U.S. regions. This has been welcome news for Arkansas landowners in a 10-county area southwest of Fayetteville. Three months ago, Clinton, AR, cattle ranchers Bill and Dan Eoff helped broker a pool of 10,000 acres of gas leases for area landowners. Five-year leases in Van Buren County brought $660/acre, plus a 20% royalty on production at the wellhead. Two years ago, gas companies were offering as little as $25/acre. Another lease pool is in the works.

USDA's average pasture-rental rates should only serve as a starting point for negotiating leases. Wide differences in land quality and improvements can impact the value of leases.

Top 10 Values in U.S. Pastureland

Region/State	2006 Value ($/Acre)	2006 Rent ($/Acre)	Price/Rent Ratio	Income Yield (%)
North Dakota	250	11.3	22.1	4.5
South Dakota	360	12.9	27.9	3.6
Nebraska	360	12.5	28.8	3.5
Iowa	1,300	38	34.2	2.9
Wisconsin	1,700	38	44.7	2.2
Kansas	620	13.7	45.3	2.2
Illinois	1,880	34	55.3	1.8
Missouri	1,500	26	57.7	1.7
Minnesota	1,150	19	60.5	1.7
Wyoming	360	4.5	80.0	1.3
National Average2	1,000	10.8	92.6	1.1

The Worst 10 Values in U.S. Pastureland

Region/State	2006 Value ($/Acre)	2006 Rent ($/Acre)	Price/Rent Ratio	Income Yield (%)
Florida	7,500	22	340.9	0.3
Georgia	7,150	25	286.0	0.3
Virginia	4,800	20	240.0	0.4
Colorado	800	4	200.0	0.5
New Mexico1	400	2	200.0	0.5
North Carolina	4,500	25	180.0	0.6
Tennessee	3,420	20	171.0	0.6
California	2,160	13	166.2	0.6
Texas	1,080	8.1	133.3	0.8
Montana	650	5	130.0	0.8
National Average2	1,000	10.8	92.6	1.1
Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value and cash rental rate estimates are as of Jan. 1, 2006. Income yield is gross rent yield before property taxes, insurance and other expenses. 1Excludes American Indian reservation land. 2Excludes Alaska and Hawaii. Sources: USDA, Farmland Investor Letter analysis.

2006 Pasture Values and Lease Rates

			Value ($/Acre)			Cash Rent ($/Acre)
Region/State		2006 Value	1-year change (%)	3-year change (%)	5-year change (%)	2006 Rent	1-year change (%)
Northeast:		3,050	10.1	39.3	57.2	26	8.3
	Maryland	8,300	13.7	127.4	140.6
	New Jersey	11,700	3.5	17.0	23.2
	New York	890	7.9	23.6	39.1
	Pennsylvania	2,480	12.7	34.1	41.7	25	-7.4
	Other States3	4,960	10.7	27.8	53.6
Lake States:		1,490	15.5	56.3	85.8	28	4.1
	Michigan	2,150	10.3	34.4	65.4
	Minnesota	1,150	22.3	84.0	119.0	19	-7.3
	Wisconsin	1,700	14.9	54.5	78.9	38	0.0
Corn Belt:		1,610	11.8	43.8	62.6	31	1.6
	Illinois	1,880	9.3	77.4	86.1	34	-1.4
	Indiana	2,090	8.3	25.9	42.2
	Iowa	1,300	21.5	62.5	78.1	38	5.6
	Missouri	1,500	11.9	42.9	64.8	26	-3.7
	Ohio	2,380	6.3	22.1	36.0
Northern Plains:		396	15.5	53.5	64.3	12.5	4.2
	Kansas	620	17.0	51.2	59.0	13.7	2.2
	Nebraska	360	12.5	41.2	50.0	12.5	4.2
	North Dakota	250	13.6	47.1	56.3	11.3	6.6
	South Dakota	360	16.1	63.6	80.0	12.9	4.9
Appalachian States:		3,320	14.1	66.0	82.4	22	4.8
	Kentucky	2,100	6.1	43.8	48.9
	North Carolina	4,500	12.5	49.5	70.5	25	0.0
	Tennessee	3,420	6.2	45.5	59.1	20	11.1
	Virginia	4,800	24.7	113.3	140.0	20	0.0
	West Virginia	1,880	13.3	56.7	77.4
Southeast:		5,710	36.0	184.1	224.4	20	5.3
	Alabama	2,100	7.7	55.6	68.0	18.5	5.7
	Florida	7,500	45.6	257.1	305.4	22	18.9
	Georgia	7,150	27.7	160.0	213.6	25	13.6
	South Carolina	2,550	10.9	34.2	56.4
Delta States:		1,800	11.1	46.3	63.6	17.5	2.9
	Arkansas	1,740	9.4	43.8	62.6
	Louisiana	1,800	7.8	37.4	45.2	19	15.2
	Mississippi	1,900	18.0	58.3	81.0	16	-3.0
Southern Plains:		1,030	24.1	74.6	85.3	8.2	-2.4
	Oklahoma	760	18.8	68.9	78.8	8.5	-5.6
	Texas	1,080	24.3	74.2	84.6	8.1	-2.4
Mountain States:		610	54.4	114.0	137.4	4	5.3
	Arizona1	1,120	72.3	138.3	180.0
	Colorado	800	29.0	86.1	105.1	4	-7.0
	Idaho	1,630	71.6	132.9	132.9
	Montana	650	75.7	140.7	170.8	5	-15.3
	Nevada1	620	77.1	143.1	153.1
	New Mexico1	400	60.0	150.0	166.7	2	11.1
	Utah1	1,160	68.1	132.0	157.8	11	22.2
	Wyoming	360	28.6	63.6	80.0	4.5	12.5
Pacific States:		1,340	12.6	40.8	57.8	14.5	7.4
	California	2,160	13.1	44.0	66.2	13	8.3
	Oregon	540	5.9	20.0	25.6
	Washington	605	3.4	16.3	21.0
National Average2		1,000	22.0	65.3	79.5	10.8	4.9
Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value estimates are as of Jan. 1 for each calendar year. 1Excludes American Indian reservation land. 2Excludes Alaska and Hawaii. 3Includes CT, DE, ME, MA, NH, RI and VT. Source: USDA