At Peoples Company, the question that is heard daily up and down the halls is a simple yet pivotal one: “What is happening in the land market?” In recent years, the answer has been straightforward - an upward trajectory. It felt like every week brought news of another record-breaking sale. The driving forces behind the surge were clear: interest rates, commodity prices, inflation, and farm income all aligned to push land values skyward. However, in 2024, the answer to that same question is not as straightforward. On any given day, you might hear of a record sale in one county, only to find a starkly different story just down the road. So, what exactly is the market doing? Here are my observations.

Quality is King

Since I stepped into the land business in 2012, one principle has remained constant: quality is king. High-quality farms are the first to appreciate in a bullish market and the last to depreciate when the tide turns. Buyers often remark that you only pay for a good farm once. Conversely, farms with drainage issues, subpar soil types, or accessibility challenges lag in bull and bear markets. It's worth noting that quality can vary greatly from one area to another, making it a subjective yet crucial factor in land valuation.

When news of a record sale breaks, it should not come as a shock. Despite the market's nuances, there's still ample liquidity in rural areas, thanks to several years of profitability for farmers. These chart-topping sales often have a story behind them, whether it is neighboring landowners competing, inherent property value-adds, or 1031 exchange buyers entering the fray. However, one constant among these high dollar sales is that the farms are high quality.

Supply and Demand

Historically, land sales can often stem from the three D's: Death, Debt, and Divorce. However, during market upswings, profit-taking, and high prices can also drive sales. Due to a perfect storm of driving forces in the industry, demand for farmland skyrocketed and a large number of farms hit the market in 2022 and 2023. Looking at the chart below, we see a notable decrease in total acreage sold in the first quarter of 2024 when compared to the previous few years. This decline could be attributed to several factors, including recent market saturation or a slight price correction leading sellers to hold onto their property and not bring it to the market. Fewer acres available will take less demand to consume, holding values higher than a person may expect with the current market headwinds.

Do Not Always Trust the Headlines

In the realm of Iowa's land market, headlines often tout the average $/CSR2 point at auction, a metric used for valuation by people in the land profession. Peoples Company's appraisal team tracks this metric for auction sales. In Q1 of 2024, Peoples Company's appraisal team saw a $180/CSR2 point average for auction sales. While this data is valuable, it is essential to understand and contextualize it. This figure only represents a fraction of sales—properties must be over 35 acres and predominantly tillable—omitting a significant portion of traditional listings and off-market transactions that happen in the state. Moreover, auctions that do not result in sales or no sales are excluded from the dataset, potentially skewing the average sale price upward. According to Iowa Appraisal data, there were eight no-sales in March of 2024 compared to three no-sales in March of 2023. In February 2024, there were nine no-sales versus just two no-sales in February 2023. This is why just reading the headlines does not tell the whole story of the land market. Digging deeper and understanding how the data is compiled is important.

Influence of 1031

Section 1031 exchange buyers wield considerable influence in rural and agricultural markets, enabling neighboring farmers to transition equity tax-free, thereby optimizing land holdings. This mechanism not only boosts transaction volumes but also empowers buyers to access properties otherwise out of reach. Moreover, for landowners near development zones, it offers an opportunity to capitalize on property values and then reinvest to expand farming operations. This strategic realignment not only fortifies local land markets but also stimulates economic growth in surrounding areas, highlighting the pivotal role of 1031 exchanges in shaping resilient agricultural landscapes.

These exchanges can significantly influence local land markets, particularly in prime development areas. Buyers leveraging Section 1031 exchanges face a narrow window to deploy their funds before tax implications come into play. Consequently, if they choose to engage in an auction or submit an offer on a farm, this sense of urgency often drives strong sales outcomes.

Conclusion

So, what does all of this mean? What is the market doing? I heard a professor from Purdue, Dr. Scott Brown on the American Farmland Owner Podcast last week say that the agriculture market is slowly leaking air like a balloon. That is a good analogy for what is going on in the Iowa Land Market as a whole. Prices are still strong but are 5-10% off the watermark from years prior. The answer can also depend on who your neighbor is, the location of the farm for sale, and local land market activity if land markets are hyper-localized. That is why you will see an 80-acre farm with an 85 CSR2 sold for $17,000/acre one day and the next week the same quality farm ten miles away sells for $14,000/acre. Because of this, whether you are a buyer or a seller, it pays dividends to partner with professionals such as the Land Agents and Peoples Company who have access to this sales information and understand the local markets.

If you are still seeking my opinion, I am still long-term bullish on land. In the short term, I believe that if interest rates do not back off and the lower commodity price environment continues, the slow leak will continue in the land market. The lack of supply and a sprinkling of 1031 money will hold markets steady. If we have commodity price increases due to weather, continued geopolitical unrest, strengthened biofuel demand for aviation fuel, or inflation, the land market will bounce back up to all-time highs in no time.