Farmland fetching peak prices far beyond the suburbs
Mark Steil, Minnesota Public Radio
January 2, 2005 FARMLAND0102
WORTHINGTON, MINN. -- The last time farmer Richard Lunz saw a land market like the current one was more than 20 years ago.
Lunz farms in Martin County on the Iowa border, where the soil is some of the most productive in the nation. In 1981, Martin County farmland prices peaked at just over $4,000 an acre. Today, they're closing in on that milestone.
"There's a lot of better land that's running in the $3,500-$3,600 area," Lunz said. "And those are comparable to what we saw in the early 1980s."
Interest rates are a big reason for the farmland price jump. The low cost of money means local farmers can bid more on neighboring land, driving prices up. Cheap money also brings in outside bidders, leading to more spirited bidding and higher prices. Lunz said the outside interest often comes from the Twin Cities.
"Every time you go up to the Cities you see another housing project," he said.
One of the new buzzwords in real estate is "1031." It's shorthand for a one-time way to avoid paying capital-gains taxes in a property deal.
It's used in all sorts of real- estate transactions, including farmland. The popularity of 1031s has catapulted the impact of urban sprawl hundreds of miles into non-metro farm areas.
Most of the new housing goes up on former farm land near cities. Farmers who sell reap a huge financial harvest, anywhere from $15,000 an acre to more than $50,000. Many would still like to farm, and they're looking for a tax break on their profits. They can do both through a 1031 exchange. It means a farmer takes the money earned on one land sale and uses it to buy a new parcel somewhere else. Usually they look for top-quality land, like the land in Martin County.
Flush with cash and anxious to avoid a tax bill of 20 percent or more, Lunz said the 1031 players usually outbid the locals.
It's happening all across the state. As cities like Mankato and St. Cloud expand, farmland is converted into developments. Mankato real-estate broker Chuck Wingert estimates a third of Minnesota farmland sales are 1031 exchanges.
"Definitely the sales that the investors coming out of 1031s are involved with, they are a factor in pushing that price above a level that would happen if they weren't there," Wingert says.
Wingert said 1031 bidders can boost the price of a particular piece of land by 20 percent or more. He says that's one reason why Minnesota land prices increased more than 12 percent in 2003, the fastest growth in the nation. But Wingert thinks the end of the boom may be in sight, with the Federal Reserve boosting interest rates.
But for now the 1031 action continues. Lunz watched a farmer from the southern Twin Cities pay more than $2 million cash last summer for Martin County farmland. The metro-area resident plans to move to Martin County and farm the acres. Lunz is always looking for extra land himself, but says prices now are too high. He's not angry, just philosophical about the 1031 buyers.
"I'm sure that a lot [of] us in the same position would probably do the same thing," said Lunz, who has farmed for more than 30 years and has seen many economic peaks and valleys.
Lunz said that the high land prices are especially hard on young farmers and that most can't afford to buy. He said people paying high land prices now may regret the move if the market turns. He saw that happen in the 1980s, when land prices fell more than 50 percent in five years.
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