What will $21,900 buy? An acre of farmland in Sioux County in northwest Iowa.

An 80-acre parcel sold at auction on October 25 for $21,900 per acre, topping the old Iowa record of $20,000 per acre set last year in Sioux County. The new record sale is seen as evidence that last summer's drought hasn't slowed down Iowa's farmland boom. The sale of 80 acres for $21,900 an acre isn't an isolated example. Another Sioux County tract sold for $19,100 on October 23 and a 74-acre parcel near Carroll sold October 20 for $16,000 per acre. Two weeks ago an O'Brien County farm near Sheldon brought $15,400 an acre.

UP, UP AND AWAY: Paying $21,900 an acre for farmland is an anomaly; it's unusual, yet experts see land values likely to continue climbing. "Capital asset pricing is about future expectations. Land bringing $21,000 an acre at an auction means that at least two bidders were pretty optimistic about the future," says Iowa Farm Bureau economist David Miller.

"Iowa didn't get hit as hard as people thought we would when the drought struck last summer," observes Mike Duffy, an ISU Extension economist. Many Iowa farmers ended up with better than expected corn yields at harvest, despite the worst drought in a half-century. Duffy estimated typical land values in northwest Iowa at nearly $9,500 at end of 2011. He conducts ISU's annual Iowa land value survey. He cites increases in gross farm income as a key factor in rising land values in 2011 but says there are also other financial reasons for the boost in land values--including low interest rates.

Northwest Iowa land that brought new record-high price has CSR of 84.1

Sioux County's 2007-2011 average corn yield is 186 bushels per acre, according to USDA. Soybeans averaged 55 bushels per acre for the same time period. Vander Werff & Associates of Sanborn, Iowa, managed the auction that resulted in a winning bid of $21,900 an acre. Landowner Henry Boelsma, who has other land and says he will continue to farm, says he is very happy with the sales price. The buyers, who are local farmers, weren't identified. There were about 75 people at the auction and a number of telephone bidders representing investors, said auctioneer Todd Hatterman, who works for Vander Werff and Associates.

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The land has a Corn Suitability Rating or CSR of 84.1 and farmers and realtors generally consider a rating of 80 or higher to be the best quality cropland. Hatterman says the land that sold for the new record price routinely returns 200 bushels per acre for corn. It returns 60 bushels per acre or more for soybeans.

Boom in farmland prices fueled by record-high corn prices, and other factors

The boom in farmland prices has been fueled by record-high corn prices generated by strong export demand and by demand for ethanol made from corn, notes Duffy. Ethanol now consumes 60% of Iowa's corn crop.

Iowa farmland prices have more than tripled since 2002, reaching an average of $7,878 per acre through late summer 2012 in a survey released last month by the Iowa Realtors Farm Institute. That increase in land values was 18.5% above the 2011 figure in the realtor survey. Land values were given a fresh boost by corn yields this year when the harvest ended up being better than expected for many farmers--despite the worst drought that struck Iowa since at least the mid-1950s.

Iowa's corn yield in 2011 is currently estimated by USDA at 140 bushels per acre, which is below the 172 bushels per acre in 2011 but better than some forecasts, which had projected the 2012 yield as low as 120 bu. per acre earlier in the summer.

Farmers are getting high prices for crops, where else are they going to invest money?

Sam Kain, Midwest sales manager for Farmers National Company, agrees with Duffy's comment about 2012 yields not being hurt as much by drought. An increase in capital gains tax from 15% to almost 24% which is set to take place after December 31, 2012 is also stimulating the number of land sales. The tax rate will increase unless Congress extends the current tax law. Congress meets in its lame duck session after the November 6 election and will likely decide what to do before year's end.

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Landowners don't want to have to pay the increased capital gains tax, if it kicks in next year when they are selling their land. So they want to sell it this year at a rate that's lower than what it might be next year. Thus, farm realtors and auctioneers are extremely busy this fall. "We have 30 land auctions scheduled in the next 35 days in Iowa alone," Kain says.

Farmers are getting high prices for crops, have cash available and are looking at investing that money in land as a better place than investing it in the stock market which is quite volatile. They don't want to put it in banks, because banks aren't paying hardly any interest on certificates of deposit these days.

What's the outlook for land values? Are they on a bubble that's ready to burst?

Some people wonder if today's soaring land prices are on a bubble and when will that bubble burst and land prices deflate? People remember to boom-to-bust cycle that Iowans endured from the mid-1970s through the farm crisis years of the 1980s when farmland values soared to record highs and then dropped very fast by two-thirds.

What makes this situation different today from the farm crisis in the 1980s? Two key things, says Kain. First, interest rates are low now, so money doesn't cost much to borrow. Also, farmers have a lot of cash because of the high corn prices. Another thing that's different now compared to the farm financial crisis in the 1980s is the lenders who are making loans to farmers to purchase land are requiring 50% or more in cash for these purchases. Banks are only loaning up to 50% of the amount for the purchase of the land. So the farmer has to come up with the remainder.

Land values will likely continue to climb; pricing is about future expectations

"While the new record $21,900 per acre sale in Sioux County is not typical, it is a reflection of optimism in the economic strength of farming in Iowa," says Iowa Farm Bureau economist David Miller. At a time when many parts of the country are struggling to climb out of an economic recession, Iowa's continued strong agricultural sector has provided a 'buffer' which has helped much of the state keep a lower unemployment rate than the national average. Also, Iowa's thriving ag economy is providing vigor to the state's financial sector. And it's adding to the state treasury in the form of income tax and other tax collections.

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Despite drought-squeezed yields in many parts of the state in 2012, the price of farmland may continue its climb because multi-generational farm families are working together, pooling their resources and betting on a strong future for the next generation. "This strong demand for land is also being driven by the continuation of relatively-low interest rates which translate into high capitalization rates for farmland," says Miller, who is IFBF director of research and commodity services. "Seven dollar corn, $15 soybeans and 2% or less for 10-year interest rates on loans for farmland are all working together to push up the value of Iowa farmland."

There is no indication that the price of Iowa land has topped out yet

While Iowa is unlikely to see many repeats of $21,000 per acre pricing for farmland, the state's farmers are likely to see farmland values continue to rise. "In general, there's no indication that Iowa land has topped out yet. We're likely to see good farmland, and I'm talking about the $8,000 to $11,000 per acre range, go up another 5% to 7% in Iowa on a year-to-year basis," says Miller.

There are many factors that influence farmland values, and sometimes those factors are thousands of miles away. "Weather problems are now creeping into Argentina and Brazilian crops, so if crop prospects in South America deteriorate again like they did last year, that's another element that would support these higher-than-normal grain prices for another six months to a year," says Miller.

He adds, "Out-of-state investors who show up at these farm auctions will also drive up prices for Iowa farmers, who have been saving and working for generations to buy land and bring their children into farming. You have to remember that capital asset pricing is all about pricing future expectations. That is, land bringing $21,000 an acre at an auction means that at least two bidders were pretty optimistic about the future."