ARE PUB­LIC AUC­TIONS OFF BASE?

WHY LAND PRICES HAVEN’T FOL­LOWED RENTAL RATES DOWN.

Successful Farming - - CONTENTS - By Steve Bruere

Peo­ples Com­pany tracks all land sales of 35 acres or more in Iowa on a weekly ba­sis. Our data re­veals some in­ter­est­ing trends. Iowa uses the 100-point CSR2 soil pro­duc­tiv­ity rat­ing to mea­sure the pro­duc­tiv­ity of a farm. Farms with a higher CSR2 are gen­er­ally of higher qual­ity and pro­duc­tiv­ity. The real es­tate in­dus­try uses the price per CSR2 to gauge the strength of the farm­land mar­ket and to com­pare the re­sults of land sales. While it’s not per­fect, this method gives an over­all sense of the trend in val­ues.

In 2017, there were 790 tracts mar­keted for pub­lic auc­tion, with 738 sell­ing. This rep­re­sents over 86,000 acres with a to­tal value of $562 mil­lion. The av­er­age price per CSR2 point of all sales in our auc­tion data­base was $120, with the land mar­ket gain­ing strength through­out the year. For ex­am­ple, a farm that sells for $8,000 an acre with an 80 CSR2 would trans­late into $100 per CSR2 point.

is it truly a seller’s mar­ket?

This data shows that land prices have proven to be sur­pris­ingly re­silient and haven’t fol­lowed rental rates down like many peo­ple an­tic­i­pated. The ques­tion is whether the auc­tion re­sults re­flect the over­all strength of the farm­land mar­ket. Is it truly a seller’s mar­ket? Our com­pany strug­gles to repli­cate the re­sults of its auc­tions when ne­go­ti­at­ing off-mar­ket trans­ac­tions or when ne­go­ti­at­ing a price on a tra­di­tional list­ing. It’s dif­fi­cult to get buy­ers to step up in these pri­vate ne­go­ti­a­tions to the de­gree they have in an auc­tion set­ting. This begs the ques­tion: Does the auc­tion method of sale gen­er­ate a higher sales price than the other meth­ods, or could there be some­thing else driv­ing this? Per­haps the prop­er­ties that are be­ing auc­tioned rep­re­sent land that is of su­pe­rior qual­ity and has not been avail­able in a num­ber of years. Per­haps the at­tributes of the farms that are sold at auc­tion are su­pe­rior to the over­all mar­ket.

Con­sider judg­ing the strength of the car in­dus­try by sales at a Bar­rett Jack­son auto sale where only the best cars are brought to the auc­tion. Does that re­flect the over­all strength of the auto mar­ket, or the de­mand for rare and high-qual­ity col­lectible cars that ben­e­fit from a com­pet­i­tive bid­ding process?

I would ar­gue that the strength in the land mar­ket is le­git­i­mate and it is, in fact, a seller’s mar­ket. There con­tin­ues to be in­ter­est in own­ing farm­land from both farm­ers and in­vestors. The fu­ture for farm­land looks great.

Yet, I do think the un­der­ly­ing fun­da­men­tals don’t nec­es­sar­ily sup­port the prices you are see­ing at auc­tions, where farm­ers rep­re­sent roughly 80% of all buy­ers.

There are 30 mil­lion acres of crop­land in Iowa, and re­search sug­gests 1% of the farm­land mar­ket turns over an­nu­ally. If 1% of the 30 mil­lion acres turns over, this would sug­gest 300,000 acres change hands an­nu­ally in Iowa. In com­par­i­son to our auc­tion data­base, we are track­ing re­sults for 86,000 acres or just shy of 30% of the acres that turn over each year in Iowa.

The re­sults you read about in farm­land sur­veys re­flect the opin­ions of the pro­fes­sion­als in the busi­ness. These are, in large part, driven by auc­tion re­sults and the pro­fes­sional’s per­cep­tion of the mar­ket.

Yet, the ma­jor­ity of the land trans­ac­tions that hap­pen are not at pub­lic auc­tion and are ne­go­ti­ated pri­vately, ei­ther through a tra­di­tional list­ing or an off­mar­ket trans­ac­tion. Pri­vate sales re­sults are not known with­out re­search­ing the sales price at the court­house. The per­cep­tion that the land mar­ket is strong is driven, in large part, by pub­lic auc­tions. Af­ter all, auc­tions rep­re­sent the purest form of price dis­cov­ery.

I con­sis­tently tell my clients that auc­tions are ide­ally suited for prop­er­ties that are of high qual­ity where there are mul­ti­ple bid­ders com­pet­ing to own the prop­erty. These prop­er­ties, like a rare car, can trade at a pre­mium to the over­all mar­ket.

For prop­er­ties that don’t have those at­tributes, find­ing a buyer to step up at the same price per CSR2 point that we are track­ing in our auc­tion data­base can be a chal­lenge.

ABOUT THE AU­THOR

Steve Bruere is the pres­i­dent of Peo­ples Com­pany, an Iowabased land bro­ker­age with a di­ver­si­fied of­fer­ing of land man­age­ment, land ap­praisal, and land in­vest­ing ser­vices in 20 states. Web: Peo­plesCom­pany.com

Steve Bruere

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