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Iowa farmland: less leveraged, but still off-limits to corporates

The proportion of farmland held debt-free has jumped in recent years, but financial investors will likely be frustrated by a lack of political will to change restrictive laws.

Agriculture in the Midwest is getting ever more capital-intensive, which tends to favor financial investors. Yet Iowan laws that make it hard for them to buy farmland are unlikely to ease anytime soon, according to an Iowa State University scholar.

The state’s anti-corporate farming laws already restrict the role of outside financial investors in the land market. But Wendong Zhang, an assistant professor at ISU, told Agri Investor that ongoing changes to the stepped-up basis tax regulations and 1031 exchange program used by landowners to avoid capital gains taxes could further discourage sales in the state’s farmland market.

“Historically, there have been pushes to get rid of those restrictions, but once you get the law passed, it takes more to repeal it than a lot of people would think,” Zhang said. “The voters in Iowa are the individual farmland owners and they may feel that if they get rid of those restrictions, it will be more difficult for them to get access to land because of more pressure from non-farmers.”

Lower leverage

His comments came after the release of ISU’s 2017 Farmland Ownership and Tenure survey, which showed that the amount of Iowa farmland held without debt has increased by 20 percent over the past 36 years.

In the report, the university finds that 82 percent of Iowa farmland is owned debt-free – a figure that stood at just 62 percent in 1982 and 78 percent in 2012.

“Currently, US farm income is half the 2013 peak and the Federal Reserve is continuing efforts to raise rates,” said Zhang. “The high percentage of land held debt-free is a major factor for the relative stabilization of the farmland market but also a reason for limited land supply across the Midwest.”

“Currently, US farm income is half the 2013 peak and the Federal Reserve is continuing efforts to raise rates”
Wendong Zhang

Zhang was also lead author of Iowa State’s Land Values Survey, which was published late last year and found Iowa farmland values across land quality classes rose by 2 percent over the previous year to an average of $7,326 per acre.

Land values have also played a role in driving cash-rent – not crop-share – leases for Iowa farmland, according to the latest study. While there was a roughly 50/50 split between the lease types in 1982, 82 percent of farmland is now leased through a cash-only arrangement.

“As landowners have become more dispersed, payment in grain becomes much more of a burden, especially for those unfamiliar with agricultural markets,” Zhang said. “Second, there has been an increase in the number of landowners each tenant has today. The more landowners there are, the more burdensome it becomes to keep grain differentiated by owner. The low-to-negative margins in production in recent years may also play a role.”

‘Sentimental’ ownership

Zhang told Agri Investor that low margins on agricultural commodities have also played a role in the shift in landowners’ primary reason for owning farmland.

The proportion of respondents saying that they own farmland primarily for long-term financial gain stayed steady at 19 percent between the 2012 and 2017 surveys, according to Zhang. During the same period, low profit margins have helped lead to a decrease in the proportion of owners reporting current income as the primary reason for ownership, dropping from 56 percent to 49 percent.

“It’s because they are older and they have even more debt paid off and they don’t have a whole lot of income to earn if they do crop-share,” Zhang said. “So that is a shift.”

He added that as the age of the average owner has continued to rise, so has the percentage of people reporting “sentimental reasons” as the primary reason for holding land, increasing from 22 percent in 2012 to 29 percent last year.

“For owners who are less than 35, there’s no one owning land for sentimental reasons,” Zhang said. “For owners who are 80 years old or above, this percent jumps to 38 percent.”

Though many of the trends revealed in the survey highlight the increasingly capital-intensive nature of farmland ownership in Iowa, which would normally creates favorable ground financial investors to come in over the long term, Zhang remains skeptical sufficient political pressure will ever build behind efforts to end restrictions on their involvement in the state.