Farmland Real Estate Up 90 Percent in 5 Years

At a time when a housing slump and the subprime mortgage debacle are hurting America, South Dakota’s economy seems to be humming - punctuated by the value of farm real estate at a record high.

The October report on South Dakota’s economy - released by the state Bureau of Finance and Management - also shows income rising, jobs being added and low unemployment.

“Overall,” said Jim Terwilliger, an economist with the bureau, “South Dakota’s economy is performing well.”

That rings particularly true in the agriculture sector.

The forecast of 551.8 million bushels of corn and 40 bushels an acre of soybeans this year would be a record. And except for hogs, livestock and crop prices are all higher than a year ago.

But what stands out is farm real estate value, including land and buildings - up 90 percent in the past five years.

It averaged $820 an acre in January - a 15 percent increase from the $710 average in January 2006 - making it the highest farm value on record.

State Agriculture Secretary Bill Even ticked off a number of reasons for the escalating values: low interest rates the past 10 years, increasing farm income because of increased productivity of crops and livestock, accumulated equity by older farmers that provides substantial collateral for new purchases, and competition for land from expanding farm operations or people seeking property for hunting and recreational use.

“Or as any auctioneer selling a quarter of farm ground will tell bidders, ‘Buy it now folks; they’re not making any more land,’ ” Even said.

High grain prices help drive up values

Tom Souvignier, a Canton-area auctioneer for the past 30 years, said he’s seen a strong increase in ag land prices lately.

He attributes the increase to rising grain prices, interest rates and “just people taking money out of different investments. Taking money out of the land I’d say is the biggest thing,” he said.

Nationwide, Souvignier said the auction business recently has seen more farmers choose to sell their land.

“A lot of this land we’re seeing being sold - and maybe this is a trend of late - has been in ownership for a number of years, and now it’s being transferred to the next generation or the generation after that, so there are now multiple owners,” he explained. “It’s easier to divide the money from selling the land than it is work the land.”

Souvignier said higher land prices benefit the seller.

“It’s an excellent opportunity for someone who’s been operating the land for a number of years to have a very good nest egg, if you will,” he said.

“I would say it’s good for the farmer in the long run, with the exception of the young farmer just starting out,” because the price of land is so high, they might be dissuaded from buying it, Souvignier said. He added that renters might struggle, too, with higher rents to pay landowners. But the overall picture for most farmers this year is promising.

Good yields and good prices rarely happen simultaneously, so what’s happening now makes 2007 a good year, Even said. But he cautioned that circumstances change, though he expects agriculture to be the backbone of South Dakota’s economy for the foreseeable future.

“To give you a snapshot of the importance of agriculture in South Dakota, if our state’s farmers were simply to sell just their 2007 grain production based on last Friday’s prices, the gross income would be $4.2 billion,” Even said. “When you add in livestock receipts, gross farm income will average over $8 billion.”

Ethanol expansion contributes to job gains

But agriculture isn’t the only sector buzzing along nicely in South Dakota.

After losing 1,200 jobs in 2002 - most of them in manufacturing - because of the national recession, South Dakota gained 900 jobs in 2003, 5,200 jobs in 2004, 6,400 jobs in 2005 and 9,000 jobs in 2006.

Terwilliger credits the increases to solid growth in manufacturing, construction, financial activities, and education and health services.

Much of the manufacturing growth is tied to the expansion of the ethanol industry, Terwilliger said. Advances in health care services in the Sioux Falls area have driven education and health services employment, he added.

And growth in construction, financial activities, and leisure and hospitality jobs is a result of a strong housing market, among other things, he said.

Housing problems worse in other regions

Though family housing building permits were down in the past year ending Aug. 31, compared to the year before, and the value of building permits issued was $133.37 million less, Terwilliger said the situation in South Dakota is not as bad as it is nationally.

“… Compared to other areas of the country, the numbers of building permits we’re seeing now is still strong,” he said.

The subprime mortgage mess also largely has missed South Dakota, he added.

Nationally, the congressional Joint Economic Committee estimates that 2 million subprime mortgages could go into foreclosure during the next 18 months as initially low introductory rates reset at much higher levels.

“Our citizens also continue to support the economy but seem to be living within their means,” Terwilliger said.

Add in low unemployment - 3 percent in August, the fifth- lowest rate in the nation - and the fact that South Dakota’s personal income grew at 7.4 percent in the second quarter of 2007 - and the outlook for South Dakota’s strong economy looks good, Finance and Management officials say.

“In 2006, our farm income dropped due to drought conditions that affected a large portion of South Dakota, causing our overall personal income growth to slow,” Terwilliger said. “In 2007 … our income growth is beginning to accelerate again, and I expect that to continue in the coming quarters due to a strong agriculture sector and continued job creation.”

Farmland real estate is up 90% in 5 years - High values an economic bright spot
By Steve Young