Iowa land values rise again - Dr. Wendong Zhang

Paul Yeager: Hey everybody, it's Paul Yeager This is the MtoM Show podcast, a production of Iowa PBS and the Market to Market TV show. Right before Christmas, in Iowa, comes a survey from Iowa State University, and the Center for Ag Research and Development or CARD. Dr. Wendong Zhang is a past guest on this podcast. He's also the one who conducts the survey, but a tiny little change for him. He has now moved on to Cornell University in New York. But he did come back to do the survey this year. And he has one more survey that he's going to keep a part of, we're going to talk about the importance of why he wanted to come back and do that survey and what the reasoning was for that. We'll get into that. We'll just have a quick little discussion about China and their impact on today's discussion. This is the M to M Show podcast. Let's get to it. 

Wendong Zhang: I just moved to Cornell University in Ithaca, New York to upstate New York. But it's as I can assure you that this both campuses are beautiful. We just have a little more waterfall and gorgeous here.

Paul Yeager: And you're not getting ready for a snowstorm like we are right here. 

Wendong Zhang: It is the same latitude ranges. So we're getting probably a similar amount of snow.

Paul Yeager: So you made the change to Cornell, what prompted the move?

Wendong Zhang: I think that we have stayed in and Midwest for 13 years. And my wife and I are most intrigued by the proximity to urban centers where we can go to Toronto, for example, for the good Chinese food. We haven't tried that yet. But we have been to Niagara Falls once already. 

Paul Yeager: Well, I'm sure the Ames business owners are gonna say We tried. We tried. But we know how that is. How would you say the two campuses are similar?

Wendong Zhang: I think that the Cornell is actually not only a private university, but also a public land use land grant university like Iowa State as well, that there's both the University have a connection where we want to do work not only for research and for students, but also do work. That is the benefits the general public. And so today, you know, we're going to talk about the land value survey that started in the 1940s. At Iowa State. That's the first of its kind in the nation. And Cornell also want to do things along those lines that benefits, agriculture and agribusiness farmers in the New York State and Northeast region as well. So I think the sort of has similar land grant ideas.

Paul Yeager: Will you start a new survey for New York, then?

Wendong Zhang: I probably will. But you know, that the value of the survey, in part has a lot of to do with its longevity and history. So I think that it's really hard to catch up to the rigor and prominence of the Iowa State University survey. So that in that sense that I was sort of lucky to have this. Well established survey records, that the if you look at across researchers across the country, that they often use ISU survey for research and for analysis, because we provide the longest and most comprehensive data, not data for farmland market us.

Paul Yeager: Well, and you mentioned already the history of this survey. And I think the last time you and I chatted, we talked about that history. So much. So you came back to do the survey here in 2022. What did you What prompted you I mean, other than the importance of history, but as a researcher, you're driven there, what prompted you to return this year to do this survey.

Wendong Zhang: I think this year is particularly interesting, because that a year ago that the Iowa land values have rose 29% that the nominal land value have surpassed it's a prior record. And so we all are anxious to see what the land market will do this year in 2022. Iowa State Land Value Survey essentially shows that the average land values in Iowa had rose in another 17%. Even if you take the inflation out that the inflation dusted value rose about eight to 9%, which means that in both nominal and inflation adjusted terms that Iowa land values have had an all time high, and even if you look at all the 99 counties close to 60 counties posted historical highs as well, especially, we see a really strong string And in northwest, northwest Iowa, if you follow the news and the auto market, you see some of the really crazy high sales of $30,000 per acre land auction sales. So those are some of the the person that factors that the new things and momentum in a landmark that drove me, I don't want to leave a gap in such important year in the end. Also, I think the long history since the 1940s. It's also major saying that, we want to make sure that we provide consistent data for all 99 counties in Iowa, using this important survey.

Paul Yeager: I've mentioned the $30,000 an acre sale a couple of times on the show, and what we're hearing, and I know this isn't necessarily part of your survey, but it was someone that paid in cash, they weren't tied to a loan on that. Is that anything you look at?

Wendong Zhang: Yes. So I think that I do another survey and you should stay tuned for next June's 2022 farmland ownership and tenure survey were in the 2017 version shows 81% of the land in Iowa are low owned free of debt. So over 80 parts of the land are owned free of debt. So even though we're seeing more downward pressure from higher interest rate, that the land market didn't respond as much in part is because that not a whole lot of land are actually entered that. And not a whole lot of land are bought using the mortgages, as you mentioned, right. So if you think about the factors, driving these changes over the past two, three years, the significantly higher commodity prices, especially for corn, soybean, especially cattle as well, that those resulted, a significant increase in farm income and and the cash on hand. And you see phenomena, it's like this, that you have cash purchases for these really significant purchases. If you've synced from a farmer's perspective, this is the single largest investment item they often buy in their lifetime. And across the sector. This also accounts for over 80% of the US farm assets as well. So you're absolutely right, that, you know, the cash on hand is a significant part of the factors that drive the rise. And another interesting part is that because the supply chain was added to cash, farmers would probably also want to buy a new John Deere tractor and combine but they can really hard find they have a really hard time finding a new one to buy. So they want to park the money somewhere and land is what they know. Right?

Paul Yeager: So does that bode well for under handling any type of ripples and a recession, if 81% or 80% of the land is cash owned or owned already that can Buffett, rural Iowa against a downturn.

Wendong Zhang: I think that if you're worried about the replay of the 1980 farm crisis, I think that we're better suited at least this time that for one that not a lot of land are under mortgage and doesn't have a whole lot of debt, right, so the leverage is low. And the interest rate our rights has risen. But it's the one you're looking at the historical rates that they are still relatively low, especially compared to the 1980s. And another thing is, when you're looking at the lending practices, the lenders are more prudent. And when you are buying land, they asked for a much higher collateral payments essentially, and also that your loan to value ratio or sort of low that if you imagine that you know 1980s, that some  lenders might be willing to lend you 80 person the market value for land purchase land parcel that you're willing to buy. But now if you're buying a land parcel that is worse, maybe $15,000 per acre, maybe you can only get like six or $7,000 from from the lender, if not more, if not, if not less,

Paul Yeager: right. And I've heard in the banking industry that there are a few banks that have said you know what, we're going to be a little more judicious in what we loan out right now until we sort some things out so, to me that translates that backs up what you're saying.

Wendong Zhang: Right? I think that when you're thinking about that what some of the factor that really cause problem in the 1980s is that when you buy a grant, and you use a lot of that, and you use the one of the fully paid for parcel as collateral, and when the newer parcel that you want to buy face, insanely high interest rate, and not only knock down that parcel that, but also take your fully paid for parcel as collateral down as well. So that's where, you know, that hurt a lot of farmers across Iowa and in the Midwest, I think that those are some provisions that built into to try to prevent that. And I think that another thing is, when you're looking at the the income grows between a before and the night at farm crisis, in the 70s, a lot of the growths are actually inflation driven. So we're now facing really high inflation. So I think that's got people worried, right. But also that while you're thinking about what we are seeing over the past 1520 years, we have seen substantial income grows from 2003 to 2013, we have seen substantial commodity price rises and real income gains over the past few years as well. So those are more tangible than the than the income pictured before we had it to the 19 farm crisis.

Paul Yeager: So that I guess you could say the scene is set differently, we'll just see how the play unfolds. Right? 

Wendong Zhang: So I think that this is this is this is not to say that pike, farmland prices benefit everyone, right? So if you're a beginning farmer, you're thinking about entering the market, your cost is astronomically higher. And if you're a producer who primarily or rely a significant amount to the rented ground, then you can expect the rent will likely rise will lighten values, as they tend to, along with your higher fertilizer prices and other input costs that you are facing a much more challenging production season than than before. I think those are some of the things that you do see, there's a real distribution effects that even when you're looking at the landowners, the senior landowners who are 65 or older that the percentage of the land they have fully paid for are probably closer to 95% or higher. Right? This the younger folks that is still often still have to mortgage as well. So we need to pay attention to the the group that is more disproportionately impacted sued to higher, higher farmland prices.

Paul Yeager: What could push us higher?

Wendong Zhang: I think that the 2022 survey, we asked people to do a forecast. And the general consensus is still I think that the they're forecasting a stable market and probably even another five to 10% growth next year. I think that the commodity prices are still really high, in part supported and fueled by the Russian Ukraine conflict, the land supply is still fairly limited. And I think those are some of the key factors that is still supporting the farmland, farmland markets. At the same time, we added a new question about asking, what is your perception of current farmland values, and over 70% of the respondents thinks current land values are too high or way too high. So I think that people are a little concerned because if you think the land market is too high, and they think the line market has stalled, still going up, that's probably tell you a little worrying sign of creation of a bubble. I don't necessarily think that's the main story yet. But as I think that we're we have we're moving towards that direction, to some extent, in some areas.

Paul Yeager: What's the ideal situation are the government talks about this soft landing or easing of inflation? Is there such a thing that's possible to happen in land values, do they ever go down significantly like they do go up?

Wendong Zhang: They do go down. So if you recall that in 2013, we had when we had corn price peak, that was about $7 corn and in 2014 2015, the corn prices was cutting half to $3. And along was a farming income cut in half and the conventional wisdom is that the land values will tends to follow probably the same direction behalf of the Mac. into it. So we should expect maybe half of the effects is about 20 25% decline, what we see is from 2013 to 2017 to 2019, there's about 15% decline in land values, I think that the much higher interest rate put downward pressures on the land market. So it's land values rough roughly equals income divided by interest rate. So the higher interest rate will mean that the find cost of financing are higher, but also the bonds are more attractive, so less demand for farmland, and the, you know, $30,000 per acre prices are also scaring some of the investors away. So I think those are some of the factors that is potentially putting more downward pressure and it takes some time for the downward pressure from the interest rate to be capitalized in a market, it takes about a well a 12 to 18 months lag, typically when the Federal Reserve make some policy movements, and in essence, that we were still likely to see a potential modest decline in, you know, say three year term. But I think that over the next year, a lot of people are still forecasting, maybe a stable or modestly increasing land market.

Paul Yeager: Modest, I mean, one to one to 3%. Is that the modest not...

Wendong Zhang: More like they're thinking probably more around five. Okay, that's five to seven, five,

Paul Yeager: and at the rate we're starting at, that's a heck of a that's still a lot of money.

Wendong Zhang: I know. I know. So, to be frank with you, I think that the when, when you, when I first looked at the market, I was thinking the land market probably will rise 10%. But we saw a 17%. Granted, it is that maybe half of the gross or inflation driven? But you're absolutely right, that those are some of the things that we haven't seen for almost a decade, that. And a lot of them are related to the really strong commodity prices, I think a lot of the income growth are coming from the price changes. And this time, we not only see crop sector, but also livestock sectors as well. So if that picture changes, I think that probably will could erode some of the profits that a farmer have and change their behavior on their land market as well. But so far, we haven't really seen much of the dent in in that regard yet.

Paul Yeager: Well, I can only imagine at some of these land sales when you used to have maybe 10 to 20 farmers bidding for a parcel of land, and it gets down to five or two, and one of them's not even in the room or in the state. You teased a little bit about this ownership and tenure survey what happened? I mean, to me at an auction when there's not as many people bidding, we're gonna go down, you mentioned that you're going to see less outside money interested in investing in farmland. Did I did I catch that? Right? Summarize.

Wendong Zhang: Right. So but I think you're right to some degree, but it's also remember that eventually only takes two people to really drive up this line prices at a particular auction. Right. So I think that across Iowa, that although the investor interest is rising, is still the local farmer buying local land story, that the that they 70 Over 70% of the land DNI or are bought by low coexisting farmers as well, that they are often as you mentioned, that some of them have cash, some of them, especially in northwest Iowa, which grow most significantly, those, many have livestock production. So they, when they see a nearby parcel, they can see economic premium, because those are closer and can benefit their expansion or use of the compliance for the manure management plan. So those are some of the reason that the people are really bidding up. And another element of this is that the, you know, the land ownership is sort of a long term commitment that the land typically is owned by the same person and the same family, over many years that half the land in Iowa are owned by the same owner for over 20 years. And so they, even though they're seeing maybe a low return now, but they're thinking maybe 20 years later that I could potentially achieve a decent return Down the road, right? So I think that when you're buying $30,000 per acre, it's probably even harder to justify these long term thinking. But that seems to be some the calculation that the farmers are making as well.

Paul Yeager: Give me a quick summary then. Do you see that it was the biggest driver for the increase this year? Commodity prices or interest rate? Or what do you summarize is the biggest driver for this year?

Wendong Zhang: Right. So there are a couple of drivers, I think the biggest driver is the much higher commodity prices with translating to much higher income. And you also resulted to the cash purchase farmers that you mentioned earlier. Right. And there's that many farmers of agricultural professional who answered the survey also noted, the interest rate remained low until summer 2022. And the yields as as was last year, become stronger despite weather challenges. And many people also noted limited land supply as well. But as if we have to point to one factor, it will be the much higher commodity prices that led to a you know, significant increase in farm income that they can use to bid on the land market as well.

Paul Yeager: Well, I look forward to talking to you in June, again, about land, we have to do that. I mean, you're one of your one of our more popular guests. But I'd also be I was looking at my notes. Before I let you go. I need to ask you about China real quick. What's China's impact on driving, say, higher commodity prices? I mean, we've seen the emergence, whether it was by that the country was ready or not from COVID. And we hear about this massive coil that might buy some US commodities. What's China's impact on all of this right now?

Wendong Zhang: I think so. This year, the the the impacts of the impact of China probably is smaller compared to 2021 2021. There's a surge in Chinese purchases of US agricultural products, because in part because of the phase one deal. And so those are translated to higher commodity prices and farm income and to some to some factor contributed to the land values as well, this year, I think is the more of the other trade situation is uncertainty that is caused by the Russia/Ukraine conflict probably push the commodity prices higher. That said China continue to buy a significant amount of agricultural products, and which especially it's relevant for, for Iowa was one ever four rows of soybean goes to China, and China will continue to be a really significant part of US agricultural exports and the the major movements in China undoubtedly will affects the farm income, and also, to a lesser degree, the asset values as well. So I think that, as China now, potentially is ready to open to the world again. And finally. And so I think we might expect that maybe a bigger row from China next year compared to 2022. Which would then

Paul Yeager: put pressure to push prices higher, I shouldn't say pressure prices, it would might Am I boost them, if there's another buyer in the market, again, back to the if there's two buyers.

Wendong Zhang: Right. So I think that that's that's certainly part of the oh, if you're if you talk with my colleague, Chad Hart, for example, the International Trade picture is actually down. For both corn and soybean, I think that has something to do with the COVID lockdown in China. And when you when you expect to China's sort of semi back to business and they want to push for at least 5% growth next year. And that that sort of will will boost the agricultural exports relative to this year. So that's why I think that when you're looking at the more immediate terms, the land market, despite the Federal Reserve will likely continue to rise raise interest rate, they're still the factor that is still keeping keep pushing the commodity prices higher as well. So I think that that's part of the thing that we likely will still see some higher auction prices that if you think back in the day, you know, five six years ago that you will be rare to see land parcels sold for more than $15,000. And over the past two three years, we realized that people only pay attention to those like a sold for more than 20, 25,000 dollars. I personally think because a little, sometimes the rate of return may be a little too low to be justified. But it seems that the proximity and longer term sinking of the farmer purchasers, the buyers are having a slightly different calculus than I do.

Paul Yeager: That's a great way to put it. Because I was going to use the old, nobody has to pencil that sharp to make that figure out. I like using yours. The calculus doesn't match up.

Wendong Zhang: Yeah, and I read a blog post and someone is wondering what kind of water we feed in Iowa to justify these auction sales as well. I think that, you know, people are paying attention because, in part because the significance of Iowa in US agriculture, and also because that we have really good data set, we can actually compare not only across the region, but also compared to you know, historically we can say with confidence that this is a real high since the 1940s. And people pay attention when you when you have a such longevity of the the data records to look at. And to compare to I think those are some of the things that that the people want to pay attention to and why they care about this service so much.

Paul Yeager: Iowa has left a mark on your doctor. You can't shake it?

Wendong Zhang: Yeah, I Well, the and my, my older one was born in Ohio and my younger one in Iowa, you know, so those are, you know, our baseline reference point forever.

Paul Yeager: I love it. I appreciate you fitting us in for this and always a good chance to talk and I look forward to visiting with you again in the future. Thank you.

Wendong Zhang: Thank you. Happy Holidays to all.

Paul Yeager: My thanks to Dr. Wendong Zhang from now Cornell University, but also Iowa State University as he talks land values if you have any feedback for me, send me an email MarkettoMarket@IowaPBS.ORG. Thank you so very much for watching, listening or reading. We'll see you next Tuesday with another installment of the M to M Show podcast.