What Drives the Price of Ag Land?

By Andy Westby, Managing Broker & Auctioneer at Goldmark Commercial Real Estate, Inc.

There is a common saying in sales that goes something like this:

“Something is only worth what someone else is willing at pay for it at the time you wish to sell it.”

There is a lot of truth to that, but of course, many factors ultimately determine what something is worth. Here are some of the largest drivers of ag land values we see in the Southern Red River Valley, many of which will apply wherever your farmland may be located.

1. Soil Quality

This one should come as no surprise. If you have strong, highly productive soils, your land will be worth more than land with poorer, under-performing soils. If you farm the land yourself, you inherently know what soil has higher quality and what soil does not. After all, the proof (i.e., yield) is often in the pudding (i.e., the bin)!

Understanding the quality, characteristics and consistency of the soil you are buying or selling is important. Some parcels of ag land may have only one or two soil types of similar quality, while others may have 10 or more different soil types, with a mix of high yielding and under- performing soils. While some buyers or sellers focus on the Crop Productivity Index (CPI) rating of a field, other buyers or sellers can do the windshield test on land during the growing season and understand where the soil may be strong or poorer. If you are not sure of the soil types on the land you are buying or selling, contact your local Farm Service Agency (FSA) office or any qualified land Realtor and they can print off detailed soil maps for you.

2. Drainage

Another heavyweight when it comes to the value of farmland is how well or poorly a piece of land drains. Good drainage on ag land has huge benefits. Well-drained soils can:

A) Generally be worked and planted earlier in the spring.

B) Support higher seed germination.

C) Grow plants with a stronger root system, which leads to better access to subsoil moisture and nutrients.

D) Produce overall higher yields.

You may have the best soils around, but if the water backs up on your land or stays on the land too long, it will have a big impact on the value of it. If a piece of land has a lot of wetlands on it and/or is prone to flooding or drown-out areas, yield potential for the land will be diminished. Generally, the lower the yield potential, the lower the value.

While much of the land in the Red River Valley is described as “flat, black and square,” that does not mean water drains the same across the entire valley. Many pieces of ag land in our area have some natural drainage features or impediments, such as small coulees or natural drains, however subtle they might be. Many farmers are now doing more man-made drainage improvements, such as surface ditching or drain tiling. While these efforts do come at a cost, the benefits can also be significant.

3. Size and Shape

Not everyone understands the inverse relationship that often exists with the size of a parcel compared to the dollars per acre once sold. In other words, the seller of a half section (320 acres) may not receive as much money per acre as the seller of an 80-acre parcel would receive per acre. The reason? The buyer pool for smaller farmland parcels is generally larger than the pool of buyers who can afford to buy or finance large parcels. This is why you often see multi-parcel sales offered where buyers can elect to buy one or more parcels at a time, rather than being forced to buy the entire farmland acreage at once.

One other aspect here that can impact value is the shape of the parcel and the number of tillable acres on it. While most parcels in our area are uniform 80s, quarters and half-sections, there are other irregular parcels impacted by things like wetlands, railroad tracks, creek beds, telephone poles, coulees, etc. Tracts that are inefficient to farm will often bring less per tillable acre than those that are farmed mile-marker to mile-marker.

4. Market Forces

Last but certainly not least, it is important to understand how both global and local forces can impact farmland prices. From a macro-perspective, big drivers of value can include commodity prices, interest rates, national policies and programs, and global demand and consumption trends. For example, recently China has been a strong buyer of soybeans, helping to prop up soybean prices that, for some time now, had been hurting. Global forces can and will impact local farmland prices, so it is important to understand what that environment is like when buying or selling land.

There are local forces that can also have a big impact on ag land prices, including things like high or low land taxes, recent weather patterns (drought or wet cycles) and unique competitive forces such as two neighbors fighting over the same piece of land for sale which would drive the price up. Even more specific to the Southern Red River Valley, we have seen increased buyer demand because of projects like the Fargo- Moorhead Diversion project that is displacing thousands of acres of farmland. Many of those forced to sell are looking to buy replacement land, which has created some demand pressure in the immediate area.

One can never perfectly predict the exact price of a given piece of land, but by having
experience with and knowledge of these varying forces, experts like our team can certainly help provide strong guidance and input to arrive on a solid value when selling or buying land. Feel free to contact me at 701-239-5839 if you think we can be of service!