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