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Friday, December 29, 2017

Revised version of "Ag Income Tax Update for Farm Families" is now available

A revised version of “Ag Income Tax Update for Farm Families” is now posted on the University of Minnesota Extension Ag. Business Management website.  The revised fact sheet is posted on the Farm Tax and Legal Issues page (please see link below).
This revised version addresses farm tax issues that will impact producers for the 2017 income tax year.  The recently passed tax reform has a very limited effect on a producer’s 2017 tax return.  I’ve confined the discussion in this document to what matters for 2017.  I will address the components of the new tax reform legislation later in the spring. 
Please feel free to contact me via email if you have any questions.  My email address is:
I want to wish everyone a safe and prosperous new year!
Thank you.

Rob Holcomb

Wednesday, December 27, 2017

Southwestern Minnesota Farmland Values Decline 6.1 percent in 2017

By David Bau, Extension Educator

At the end of each year for the last twenty-three years, a survey has been conducted of farm land sales in fourteen southwestern Minnesota counties.  The survey reports bare farm land sales to non-related parties for the first six months of each year. Land values had been steadily increasing until 2014.  After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014.  The downward trend continued through 2017.  The summary report for this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine Counties.  This year the decline across the fourteen counties averaged 6.1%.  Average land values had not declined since 1996 when the average SW Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 to $8,466 then declined in through 2017 to $6,340.

Data from these counties indicate prices decreased from an average of $6,751 in 2016 to $6,340 in 2017 or a decrease of 6.09%.  This is only the fourth decrease as far back as this data has been collect since 1995.  In 2013 was the largest year to year increase of 35.6%.  Farmland prices decreased in eight counties and while increased in six counties including Chippewa, Cottonwood, Jackson, Lac qui Parle, Redwood, and Yellow Medicine from 2016 to 2017.  There was a lot of variability in the numbers from 2016 to 2017.  The largest increase was in Lac qui Parle County with an increase of 22.0% while Rock experienced the largest decrease of 29.8% for the sales that met the bare farmland to non-related party transaction requirements.

Rock County had the highest average sale price of $7,545 per acre and Lincoln the lowest at $4,415 per acre.  The average Crop Equivalency Rating (CER) for the fourteen counties was 69 with the highest price per CER in Chippewa County at $101.20 and the lowest in Lincoln County at $76.12 per CER.  The assessed values for the third year in a row were higher than actual sales price with the assessed value at 103 percent of the sales price.  Historically the assessed value would be 75 to 80 percent of the sales value.  Nine counties experienced average sales prices that were lower than the assessed values in 2017.  While five counties experienced average sales prices that were more than the average assessed values, the lowest percentage was 90.01% in Lac qui Parle County.

Each year sales vary within a county and be closer to a larger city which would have an effect on these average values from year to year.  The quality of the land sold within a county may be a factor in the wide swings in the prices from year to year in individual counties. The number of sales in each county varies greatly from year to year.  The 6.1% decrease is well below historical increases of 1 to 2 percent.  For the last ten years there have been large percentage increases.  In the eight years before 2014, prices increased at an annual rate of 15.3%.   There are several factors that have an effect on land values.  Farm incomes, grain prices, interest rates, return on other investments and 1031 exchanges are often mentioned as reasons for the increase.  Farm profits were weaker in 2013 and turned negative in since 2014 with lower commodity prices.  There were good to record profits in the Southwest Minnesota Adult Farm Management program, from 2005 through 2012.   During 2013, half the farms in adult farm management in Southern Minnesota lost money on corn production.  This loss has continued through 2017. Many hog and dairy producers experienced a tough year in 2010 many with losses instead of profits with poor prices for their commodities and high feed costs. 

If the average farmer had losses from 2014 through 2017, this would soften local demand for the land from farmers.  Interest rates continue at historically low levels although are slowly increasing and land rental income is comparable or higher than what an investor can earn from treasury bills, bonds or certificates of deposit at financial institutions.   The stock market rebounded significantly since its low in March of 2009 to current record levels.  The 1031 exchange is for farmers or property owners who have land in an area of increased value due to location to city or development and rather then pay taxes on large gains from the sale of land they purchase like property or other farmland at a more reasonable price elsewhere, which increases rural farmland demand. 

The reason for increases or decreases in farm land sales prices is a combination of all of these factors.  If you would like a copy of the two page document on the trends in farm land sale prices, contact your local county Extension office at any of the fourteen counties listed above.

Which direction will farm land values go depend on several factors?  Supply and demand will determine this. The simple return on investment which is determined by rental rates will determine how competitive farm land is compared to other investments and this will determine a value for farm land.  Corn and soybean prices for 2018 crop are much lower than previous years.  This should have an impact on profits, farm rental rates and eventually farmland values.  The government programs have an influence as well through the farm bill.   If interest rates rise or farm rental rates fall, the value of land is sure to be affected in a negative way and that will cause a decrease in land values.  The table below indicates average land prices from 2012 to 2017.

Friday, December 22, 2017

Cropland Rental Rates Compared to Corn and Soybean Price Change

By David Bau, Extension Educator

In Table 1 below I compare the changes in average farmland rental rates to the annual changes in corn and soybean prices. I did to determine how closely farmland rental rates follow the changes in corn and soybean prices.

Column 1 lists the years used for comparison starting in 2000 going through 2016.  Column 2 lists the average cash corn price each year in Worthington Minnesota. Column 3 lists the average cash soybean price in Worthington. Column 4 lists the change in the average corn and bean prices from the previous year. Column 5 is the average rents paid by roughly 1200 farmers each year who participate in adult farm management programs across southern Minnesota. Column 6 uses the previous year’s average rent in column 5 multiplied by the following year’s change in corn and soybean prices to compute a projected rent and does that for each year. Column 7 starts with the average rent in 2000 in Column 5 of $98.31 and multiplies this number by next year change in corn and soybean prices of -3.21% to estimate a average rent of $95.16 and then uses Column 7 average rent multiplied by the percent change in corn and soybean prices the next year.

In Column 5 you can see the average rents slowly increased from 2000 through 2013, the last year corn price were above $6.00 and soybeans almost averaged $14.00.  Then as prices moved lower so did the average rents. If compared profitability numbers to average rents, it would indicate rents are slow to go up in the good profit years and slow to go down in the poor profit years.

If you compare column 5 with column 6, averaged rents are much more volatile in Column 6 and this corresponds to the dramatic changes in corn and soybean prices each year in Column 3.  If you compare the rents in Column 5 to the rent in Column 6 you will find less than $2.00 per acre difference in the average rents from 200-1 through 2016 indicating the strong relationship between rents and cash prices for corn and soybeans.

The last column is even more reactive than column 6 to the price changes and these rental rates were much higher when prices were increasing. There were much higher rents that did follow the higher end rents paid in many southern Minnesota counties.

When examining these figures, you can see a very strong correlation between rental rates and the average cash prices for corn and soybeans.

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