It takes two to tango. It takes the supply side of the market as well as demand to create the "land market dance."
We have been following the market for many years, observing the amount of land being offered for sale in any given time period. Historically, the agricultural land market has almost always been a "thin market," with no more than 3 to 4% of the land base sold in any given year. That suggests that the average probability of any typical agricultural land parcel coming onto the market was about once every 25 to 30-plus years.
More recently, however, market observers have indicated that the number of offerings for sale is even lower than these historical rates. Apparently, individuals owning land are not as anxious to sell it given the perceived limited rates of return on alternative investments, and the satisfaction of enhanced wealth in recent years from holding ownership to agricultural land.
Using recorded real estate transfer records from the Nebraska Department of Revenue-Property Tax Division, we were able get an accurate assessment of arms-length agricultural land sales (parcels of at least 40 acres) for each county in the state. Using the volume of acres sold from Jan. 1, 2010, through June 30, 2011, they determined the average monthly sales rate and converted it to an annual average. When divided by total acres in farms for each county (from the most recent 2007 Census of Agriculture) the result is an annual percentage rate of sales turnover.
The results are rather surprising. The recent rate of agricultural sales activity for the state is 1.24%, far less than half the historical average. And in some counties, particularly some eastern counties where the land value climbs have been the most extreme, the turnover rates fall well below 1% per year. This means that the probability of a particular land parcel being offered for sale now is more like once in 100 years.
Much of what we are observing in agricultural land markets as of late is essentially a scarcity-driven market. Market forces are pushing the demand curve for agricultural land outward. But at the same time, those same forces are causing existing landowners to forgo selling land, which, in turn, shifts the supply curve backward. The result is steep climbs in land prices when sales take place. There are a couple of interesting implications to this pattern.
First, potential buyers tend to operate differently in a market with few opportunities for purchase. Even when financial conditions may not seem the best or the bid levels start exceeding the person's comfort zone, those buyers may still play their opportunity-to-buy card, knowing that they may not get another chance for some time. It's not unlike our memories of playing Monopoly and buying Park Place or Boardwalk when we happened to land on them. It tends to be a long-run risk management strategy even though it may be somewhat stressful in the short run.
Secondly, as soon as owners of agricultural real estate begin to see better alternative investment options and start selling more land, the land market dynamic could change rather quickly—potential buyers would see more offerings available and bid less aggressively on any one particular parcel. In turn, potential sellers, seeing lower sales prices, might even speed up their plans to sell.
Since it takes only a relatively small increase in number of tracts offered in any given local real estate market, the reset from previous price highs could be swift and fairly substantial.
But for now, the dance continues. And until the market forces behind rising demand for agricultural land subside and/or the opportunities of economic returns for current owners of land rise, don't look for much change in this market dynamic—it will remain a tight dance.
Contact Johnson, at 4020-472-1794 or email him at [email protected].
Johnson is a University of Nebraska-Lincoln ag economics professor.