Land values continue to climb ... for now
The value of cropland in South Dakota is higher now than ever before.
That's good news for Bob Hansen, an auctioneer and real estate broker with an office in Salem.
"It makes for a lot of happy sellers," Hansen said.
In June, 241 acres in Brule County sold at auction for $6,300 per acre and 166 acres in Charles Mix County sold at auction for $7,200 per acre -- both records in their respective counties, according to Hansen.
In one sale in Lake County, 151 acres sold for $9,100 per acre and another 160 acres sold for $8,100 per acre.
"That's been about the top of our market," Hansen said.
Despite the high prices, buyers still view cropland as a safe investment.
"Even at these prices," he said, "they can still expect somewhere between a 3 and 5 percent return."
From 2012 to 2013, the average value of cropland in South Dakota increased 30.2 percent to $3,020 per acre, according to a report by the U.S. Department of Agriculture.
That growth rate is the second highest in the nation, behind only North Dakota, where the value increased 41.5 percent in 2013, to $1,910 per acre.
In South Dakota, the average value of cropland has more than doubled since 2009, when it was $1,400 per acre.
"People feel that if selling was in their plan, now is as good a time as any," Hansen said.
A high demand for crops, especially corn and soybeans, has led to relatively high profits for farmers in recent years, according to Matt Diersen, a risk and business management specialist for South Dakota State University Extension. That, paired with historically low interest rates, has led to the recent run-up in cropland values in the state, he said.
Increasing land values have also made cropland an attractive investment for farmers and other investors, according to Jack Davis, economics field specialist at the Mitchell Regional Extension Center.
"Land is the best, or has been in recent years," Davis said.
The increases in South Dakota and other nearby states this year follows similar increases in the main Corn Belt states.
In the USDA's Northern Plains region, which includes Kansas, Nebraska, North Dakota and South Dakota, the average value of cropland increased 25 percent in 2013, to $2,950 per acre. In the Corn Belt region, which includes Illinois, Indiana, Iowa, Missouri and Ohio, the increase was less, at 16.1 percent.
But the average value of the cropland in the Corn Belt region, at $6,980 per acre, was still more than twice the average value in the Northern Plains region.
High prices mean increased risk for farmers borrowing money to invest in land, who could be stuck making expensive land payments if crop returns decline, Diersen said.
"Those land purchases made last year or this year aren't going to look like the best decision five years from now if land values change," he said.
Diersen expects interest rates will hit bottom and begin to increase slightly within the next year.
"There isn't much more room to go down," he said.
Higher interest rates and lower crop prices will probably limit the increases in cropland values in the near future, Diersen said.
But even if land values decline, most farmers won't struggle to survive because they have not put too much borrowed money into land purchases.
"I don't necessarily see it as a big bubble that's going to burst," Davis said, "but it might be an easing of its growth rate."
Lenders have also been careful not to give out too much money to farmers investing in land, limiting their risk if land values start to decline, Diersen said.
"If it was more heavily leveraged, if there was more financing involved, then it would be a more dangerous venture," he said.
The risk is also lessened because, even if land values decline, farmers are still able to use the land to grow crops or for other agricultural uses, Diersen said.
Though the value of cropland has increased dramatically in recent years, Diersen pointed out that most farmers are looking beyond the year-to-year trends.
"Land is a long-run decision," he said. "You always have to be thinking about the 20-, 30- or 50-year returns."
Still, land will always be an important asset for farmers and an important indicator for the farm economy, Diersen said.
"It's going to continue to be an important market to watch," he said.