MINNESOTA AGRICULTURAL ECONOMIST

Transcription

1 MNNESOTA AGRCULTURAL ECONOMST No. 650 January 1986 The Minnesota Rural Real Estate Market in 1985 Douglas Dion and Philip M. Raup Summary The value of Minnesota farm real estate declined in 1985 for the fourth consecutive year. The average estimated value per acre of Minnesota farmland from July 1984 to July 1985 dropped 26 percent, or from $927 to $686. The average reported sales price per acre declined 32 percent to $864. Declines in rural land values occurred in all regions of the state, but were especially severe in the agriculturally rich areas of southern Minnesota. While expansion buyers still purchase most of the acres sold, their market share fell to 67 percent in 1985, while investors outpaced sole-tract (whole-farm) buyers for the first time in at least 31 years. Retirement was listed most often as the primary reason for selling, and contract for deed was the most popular method of finance, although there was a slight increase in the frequency of cash sales. ntroduction For the past 75 years, the University of Minnesota has been collecting data on developments in state and regional rural land markets. Since 1953, this infonnation has been obtained by a yearly survey mailed to brokers, farm managers, insurance agents, county officials, bank officers, and others acquainted with the rural real estate market in their area. The 1985 survey gathered responses from 732 individuals, for a response rate of 49 percent.. Respondents provided two types of nformation. First, they reported for their area data on the average estimate of value of farmland of various grades, trends in the volume of sales, and various facts about the level of their own participation in the rural real estate market. Second, respondents provided nformation on actual sales which occurred during the first six months of 985. This information included location of the sale by township, number of acres sold, price per acre, the quality of land and any buildings on the land, method of finance, and characteristics of the buyer and the seller. Sales between close relatives were excluded. The information from this survey is summarized in five parts. The first part presents information on the current land market situation for Minnesota, broken down into the six reporting regions for which data extend back to The second section analyzes the reported sales data in terms of the 13 Economic Development Regions of Minnesota. Section three surveys the land market in the Greater Twin Cities Metropolitan Area. Section four presents a detailed analysis of rural real estate trends in southwestern Minnesota. The final section investigates trends in the level of activity in the Minnesota rural real estate market. SECTON ONE Estimated Values of Farmland in 1985 The average estimated value per acre for Minnesota farmland in 1985 was $686, representing a decline of 26 percent and an absolute decline per acre of $241 from the 1984 figure of $927 (Table 1). This was the fourth consecutive year of decline in Minnesota average farm land value per acre. Historically, the decline in represents the largest percentage oneyear decline in the history of the survey. (The previous record was a 25 percent decline over the two years from to ). n all six regions of the state declines in farmland value per acre were greater than in The Northwest experienced the smallest decline with a drop of 13 percent, while the Southwest reported the highest decline of 3 per- Table 1: Estimated Average Value Per Acre of Farmland, by District, Minnesota, South- South- West East North- North- Years east west Central Central west east Minnesota AGRCULTURAL EXTENSON SERVCE UNVERSTY OF MNNESOTA

2 Table 2: Annual Percentage Changes in Estimated Farmland Value per Acre by District, Minnesota, and CP and GNP mplicit Price Deflator, District Southeast Southwest West Central East Central Northwest Northeast Minnesota CP 1 GNP lmplicit 1 2 Deflator for Personal Consumption Expenditure Percentage Change in Estimated Farmland Value The changes in price deflators were calculated by comparing the average for the first six months of the year with the average for the first six months of the previous year. 2Economists often contend that the Gross National Product (GNP) implicit price deflator for Personal Consumption Expenditures is a better indicator of price changes than the Consumer Price ndex (CP). The CP measures prices for a specified collection of goods and services which are typically purchased by urban consumers. The GNP implicit price deflator includes the weighted price changes of all goods and services acquired through personal consumption expenditures. Figure 1 : Estimated Land Values per Acre in 1985* (Excluding Hennepin and Ramsey Counties),_URRAV ROC!(. ~OBUS JACKSOt-i Northeast $362 Down$74 MNNESOTA $686 DOWN$241 Top Figure: 1985 Estimated Value Per Acre Botton Figure: Change since 1984 *Based on reported estimates of average value per acre of farmland for the first six months of cent (Table 2). Declines were greatest for the agricultural areas of southern and western Minnesota, although significant declines were reported in the North as well (Figure 1). The most valuable farmland monetarily is still in the Southwest district, which reported an average estimated value per acre of $967, followed in descending order of value per acre by the Southeast region ($861), the West Central region ($690), the Northwest ($510), the East Central region ($374), and the Northeast ($362). This order of values, except for occasional reversals between the East Central and the Northwest regions, has characterized the regional rankings since Deflating the figures for the estimated value of farmland permits a comparison ofland values with the effects of inflation removed. n current dollars, the statewide 1985 nominal estimate of land value was approximately equal to the 1976 nominal figure. Deflating the estimated values by either the Gross National Product (GNP) deflator for Personal Consumption Expenditures or the Consumer Price ndex (CP), shows that in 1972 dollars the average estimated land value in 1985 ($304) was approximately equal to the figure for 1973 ($287). The survey results indicate that, in terms of real purchasing power, land value declines since 1981 have wiped out all of the gains made during the land boom years in the real value of Minnesota rural real estate. Reported Sales Data were collected on 796 reported farmland ~ales that took place between January, 1985 and July 1, This is a decline of 35 percent from the 1230 sales reported for the first six months of Based upon these reported sales, the average sales price per acre of Minnesota farmland in 1985 was $864 (Table 3). This figure represents a nominal price decline of 32 percent from the figure of $1263 for This 32 percent decline is accounted for by substantial drops in average reported sales prices for all regions except the North east, which remained essentially unchanged, and a shift in market activity to the Southeast and Southwest regions. n other words, the areas of the state where the declines in sales prices were largest in 1985 also accounted for_ a larger percentage of total sales than tn

3 gnoring these shifts in market activity can distort calculated trends in aggregative average sales prices. To compensate, adjusted average sales prices were calculated. For each county in a region, the average reported sales price per acre for 1985 was calculated, and then multiplied by the 1984 figure for acres sold in that county. The resulting figures were summed across counties to yield a regional figure, which was then divided by the total acreage reported sold in that region in 1984 to arrive at the 1985 adjusted average sales price per acre for the region. This removes the effect of any shifts in the relative frequency of sales in areas of high-priced and low-priced land within the region, between 1984 and The figure for the state as a whole was similarly computed by taking the average reported sales price for each region and multiplying this figure by the 1984 share of total acres sold for that region. The results of this process for all regions were summed to obtain the adjusted average sales price per acre for 1985 for Minnesota rural real estate. Using these procedures, the adjusted sales price for Minnesota farmland fell 25 percent from 1984 to 1985, (Table 4). This figure is lower than the unadjusted decline of 32 percent, indicating the importance of shifts of market activity towards higher-priced lands of the southern part of the state. This adjusted decline of 25 percent is also greater than the adjusted decline of 8 percent in n fact, all regions except the Northeast reported adjusted declines greater than the declines reported in 1984, with the greatest declines occurring in the Southwest (- 35 percent), Southeast (- 25 percent), and West Central (- 20 percent) areas of the state. The percentage decline in the adjusted sales price of25 percent (Table 4) corresponds closely with the decline of 26 percent in estimated value of farmland (Table 2). The correspondence among the declines in estimated value and adjusted sales price was especially close in the Southwest, Southeast, and West Central rgions, as well as for Minnesota as a whole. Adjusting the sales price had the largest effect in the East Central region, where the unadjusted sales price decline was 21 percent while the adjusted figure showed a decline of only 12 percent. n the Northeast, the unadjusted figure showed almost no change from 1984, while the adjusted Table 3: Average Reported Sales Price per Acre of Farmland, by District, Minnesota, (Unadjusted) South- South- West East North- North- Years east west Central Central west east Minnesota %Change Table 4: Annual Percentage Changes in Adjusted Sales Price per Acre, by District, Minnesota, and CP and GNP mplicit Price Deflator, District Southeast Southwest West Central East Central Northwest Northeast Minnesota CP 1 GNP lmplicit 1 2 Deflator for Personal Consumption Expenditure Percentage Change in Adjusted Sales Price The changes in price deflators were calculated by comparing the average for the first six months of the year with the average for the first six months of the previous year. 2Economists often contend that the Gross National Product (GNP) implicit price deflator for Personal Consumption Expenditures is a better indicator of price changes than the Consumer Price ndex (CP). The CP measures prices for a specified collection of goods and services which are typically purchased by urban consumers. The GNP implicit price deflator includes the weighted price changes of all goods and services acquired through personal consumption expenditures. figure showed a decline of 8 percent. Using these adjusted figures, we can argue that had 1985 not witnessed an increase in land sales activity in the relatively high-priced lands of southern Minnesota, the drop in statewide average unadjusted sales price per acre would have been much lower. Table 4 also includes percentage changes in the Consumer Price ndex and in the Gross National Product implicit deflator for Personal Consumption Expenditures. Since prices were falling, the percentage change in the deflator must be added to the percentage change in adjusted sales price to derive the real percentage change in average adjusted sales price. This procedure takes account of the presence of inflation. For example, a nominal increase 3

4 of 3 percent in reported average adjusted sales prices coupled with a 4 percent increase in, for example, the CP, would represent a real decline of 1 percent rather than an increase of3 percent. Using the CP, the decline in 1985 was 29 percent in real adjusted sales price per acre; using the GNP deflator gives a decline of a little over 28 percent. These declines in real sales prices are consistent with the declines in real estimated values; using either the CP or the GNP implicit deflator to deflate the average statewide estimated value of farmland per acre results in an approximate decline of 30 percent in real average estimated value offarmland per acre in Since the 1981 peak in values and sales prices for rural Minnesota farmland, the real adjusted sales price has fallen 43 percent using the GNP deflator and 45 percent using the CP; in contrast, the estimated average value of farmland has fallen 53 percent using the GNP deflator and 55 percent using the CP deflator. Based on the real per acre estimated value of Minnesota farmland, the declines from 1981 to 1985 have wiped out well over half of the purchasing power represented by an acre of agricultural land. Type of Buyer Respondents to the Minnesota Rural Real Estate Market Survey are asked to classify the buyer in each reported sale into one of three major groups. Sole-tract buyers are operating farmers who desire to farm the purchased land themselves and are not using the purchase to expand an existing land holding. Expansion buyers are those who are adding on to existing land holdings. Agricultural investor buyers are those who do not plan to operate the land themselves and who may rent out the land or operate the farm through a manager. Shifts in the activity of these different types of buyers have been especially helpful in understanding trends in the Minnesota rural land market. The large swing towards expansion buying, for example, was one of the most prominent features of the land boom of the 1970s. n 1985, expansion buyers accounted for 67 percent of all acreage in reported sales, investor buyers accounted for 19 percent, and sole-tract buyers purchased 14 percent of the acres reported sold, (Table 5 and Figure 2). These numbers represent departures Figure 2. Minnesota: Percent of Acres Sold by Type of Buyer, nvestor Buyer Expansion Buyer Table 5. Proportion of Acres Purchased and Average Sales Price Per Acre by Type of Buyer, by District, Minnesota, 1984 and District Southeast Southwest West Central East Central Northwest Northeast Minnesota Sole-Tract Operator % $ % $ Expansion Buyer % $ % $ nvestor Buyer (AG) % $ % $ from the usual pattern of market activity in Minnesota. The drop in market activity among expansion buyers from last year's record high of 79 percent was the first drop since 197 5, and the largest drop in market share for expansion buyers since n addition, 1985 marks the first year since 1954 that investor buyers accounted for a greater share of the market than sole-tract buyers. n spite of the increase in the proportion of sales attrributed to investor buyers and the decrease in expanion buying, the Minnesota rural real estate market remains largely localized. Buyers living less than 5 miles from the land they purchased accounted for over half of the acres reported sold; buyers living less than 10 miles from their purchase bought almost 75 percent of the acres sold; and 90 percent of the farmland sold was purchased by buyers liv- ing within 50 miles. The remaining 10 percent of the tracts bought by buyers living more than 50 miles away represents an increase over the 7 percent market share for this type of buyer in Although there is little evidence of a major transition in the localized nature of the Minnesota rural real estate market, there is evidence of some increased non-local activity in sales. The increase in investor buying is small, but significant. One possible explanation given by some respondents to the survey is that there is now a belief that land is undervalued in some areas, and that investors are buying land with the expectation of higher land values later. Corroborating this thesis is difficult, using percentage data. Sales activity has declined across the board, but not in equal proportions for each type of buyer. t is interesting to note that even with slightly diminished sales, investor 4

5 buyers purchased a larger number of acres in 1985 than in 1984, while both sole-tract operators and expansion buyers bought fewer acres in 1985 than in the previous year. n interpreting this trend it must be kept in mind that these are proportions of a total number of sales that in 1985 was 35 percent below the level of Reasons for Sale Retirement reemerged in 1985 as the major reason for sale, accounting for 25 percent of the number of tracts sold. Retirement has long been the most frequently given reason for sale, with the exception of n that year, the most frequently cited reason for sale was to reduce the size of farm operation. n 1985 size reduction accounted for only 18 percent of the decisions to sell. Death was given as the reason for sale in 17 percent of the cases in 1985 while sales due to the owner's decisio~ to quit farming dipped slightly from last year to 12 percent of the sales. Theremaining 25 percent of sales were attributed to "other reasons." Of those other reasons, 16 percent of all sales were related to financial difficulties or foreclosures. Thus, financial difficulties were the major reason for sale in 34 percent of the sales occurring in Minnesota in the first six months of 1985 the same figure given for the first si~ months of Across regions, retirement was given as the most important reason for sale in all regions except the Northwest, where only 14 percent of the sales were due to retirement while 21 percent of the sales reflected a decision to decrease the size of operation. t is interesting to note that the Northwest had the greatest percentage among all regions of sales to expansion buyers (86 percent) and also the highest percentage of acres sold ''to reduce the size of operation." This suggests that, among the six regions, land market activities reflecting decisions to expand or cut back land holdings are most volatile in the Northwest. Method of Finance. The survey asks respondents to dentify each reported sale by the method of financing used. For Minnesota as a whole, 29 percent of the acreage sold was financed by cash, 22 percent by mortgages, and 49 percent by contracts for deed. Compared to the 1984 results, these figures represent a 1 percentage point drop in the use of contracts for deed, a 2 percentage point drop in the use of mortgages, and a 3 percentage point rise in the use of cash. These aggregate figures disguise wide regional disparities in the use of the three financing instruments. While contract for deed financing is the most frequently reported method in four of the six regions, in the Northwest and Southwest regions cash sales accounted for approximately 41 percent of all sales. The aggregate figures hide the popularity of contract for deed financing in the Northeast, where it was used in 1985 to finance 90 percent of the acres reported sold. The statewide figure reflects the greater frequency of sales in the southern portion ofthe state, leading to disparities between regional and statewide figures. n addition, the aggregate annual figures can hide trends in the data. While contracts for deed are still the most frequently used method of financing, in five of the six regions the percentage of sales financed with contracts for deed declined from 1984 levels. n contrast, the percentage of sales financed by cash increased in all six re?ions, with the largest jump occurring m the Northwest, from 25 percent in 1984 to 42 percent in The use of mortgages as a financing instrument in 1985 has declined in frequency across the state except in the Southeast, where its use accounted for 24 percent of all sales versus 18 percent in Claims about the impact of financing instruments on land prices are difficult to substantiate. t is frequently claimed that the use of contract for deed financing results in inflated land prices. While this analysis is far from a complete study of the effect of financing mstruments on land prices, it is interesting to note that aggregate data provide some corroboration for the buoyant effect of contract for deed financing on land prices, once sales are classified by land quality. n all categories of land quality, sales financed by contract for de~d showed a higher statewide average pnce per acre than sales financed by either cash or mortgages. The tendency for contract for deed financing to be us~d in transactions involving higher pnced land must be kept in mind in seeking an explanation for this phenomenon. SECTON TWO Market Trends by Economic Development Regions n 1967 the State of Minnesota replaced some 160 different systems of classifying the state into regions with a uniform system of 13 Economic Development Regions (EDR). Since 1970, the Minnesota Rural Real Estate Market Survey has provided an alternative analysis of land market data, using these 13 EDRs. Due to the larger number of divisions of the state and the relative homogeneity within areas, analysis using EDRs permits a more detailed study of market activity. For 1985, the highest average reported sales price per acre for farmland was $1423 for Region 11, the Seven County Metro Area (Figure 3). This was the first year since 1974 that Region 11 reported the highest average sales price per acre, interrupting a 1 0-year period during which the South-Central Region 9 consistently reported the top average sales price. While Region 11 reported a 13 percent drop from last year's average reported sales price of $1642 (Tables 6 and 7), this drop represented the second smallest drop among the 13 EDRs. Region 9 on the other hand, saw a 29 percent drop, the third largest drop in the state. The largest percentage change in sales price (- 31 percent) occurred in R~gion 10, which is characterized by a mixture of cash crops, livestock agriculture, and urban-type land uses. This nominal drop of 31 percent represents a real drop of 35 percent when deflated with the CP or 34 percent using the GNP deflator for Personal Consumption Expenditures (Table 7). The s~allest drop in average reported sales pnce per acre was in Region 5, which reported a nominal decline of only 7 percent, and a real drop of 10 percent to 11 ~ercent. Region 5 was also the only regwn to ~eport a smaller percentage drop than m Caution must be exercised in interpreting the data for regions 2 and 3 due to the historically volatile land market and small number of sales in those regions. The pattern of statewide market activity that results from this analysis is clear. While average reported sales prices have fallen across the state, the sharpest declines occurred in the agriculturally rich south. Regions 1, 2, and 5 all experienced declines of less than 5

6 Figure 3. Minnesota Economic Development Regions and the Greater Twin Cities Metropolitan Area. 20 percent. Regions 3, 4, 6W, 7W and 7E form a middle band with declines in reported sales price ranging between 20 percent and 28 percent. Regions 6E and 11 form an ''oasis'' of smaller declines of 16 percent and 13 percent respectively. Regions 8, 9, and 10, comprising some of the highest priced land in the state, suffered near-equal declines of 30 percent for Region 8, and 29 percent for Region 9, and 31 percent for Region 10. The declines in average reported sales price per acre for farmland in Minnesota in 1985 were, with the exception of the Seven-County Metro Area, the greatest for the highest priced and most agriculturally productive land. The relatively inexpensive and less agriculturally productive land to the north experienced declines as well, but not as great as those in the south. The realignment of relative sales prices since 1981 has returned Region 11, the Twin Cities Metro Region, to the top position in farmland sales prices, when classified by Economic Development Regions. This was the position it held prior to the onset of the land boom in SECTON THREE The Rural Real Estate Market in the Greater Twin Cities Metropolitan Area Table 6: Average Reported Sales Price per Acre of Farmland, by Economic Development Regions, Minnesota, (unadjusted) Economic Development Region Dollars per Acre W E W E Minnesota A closer look at the rural land market in the expanded Twin Cities area is justified for two reasons. First, an anal ysis of sales in and around the Seven County Metro Area reveals the general effect of urban influences on the rural real estate market. Second, a closer look at market activity around the Twin Cities area (Economic Development Regions 11 and parts of7e, 7W, 6E, 9, and 10) can help explain the land price patterns observed in Section Two. The Greater Metropolitan Area is defined in this study as a 16-county re gion surrounding the Twin Cities (Figure 3). To permit closer analysis, the Greater Metropolitan Area has been divided into three sub-areas based upon population levels, recent rates of population growth, productivity of the land and historical trends in land values. The Seven County Metro Area includes the counties of Economic Development Region 11: Anoka, Washington, Ramsey, Hennepin, Carver, Scott, and Dakota. This area is bordered on the north by the North Metro Fringe, including 6

7 Table 7: Annual Percentage Change in Sales Price per Acre, by Economic Development Regions, Minnesota, and the CP and GNP mplicit Price Deflator, Economic % Change in Sales Price Development Region W E W E Minnesota CP GNP mplicit Price Deflator for Personal Consumption Expenditures Table 8: Average Reported Sales Prices Per Acre, Greater Twin Cities Metropolitan Area and Subareas Year Seven-County Metro South Metro Fringe North Metro Fringe Greater T.C. Metro (16 counties) Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, Washington Counties. 2 Goodhue, Mcleod, LeSueur, Rice and Sibley Counties. 3 Chisago, santi, Sherburne, Wright. 4 A sixteen counties named above. Chisago, santi, Sherburne and Wright counties. The counties to the south of the Seven Country Metro Area make up the South Metro Fringe: Goodhue, McLeod, LeSueur, Rice, and Sibley. The highest average reported price per acre for 1985 was for land in the Seven County Metro Area ($1423) (Table 8). t is important to add in this regard that although Hennepin and Ramsey counties are nominally included in the Seven County Metro Area, farmland sales reported in these Minnesota two counties are not included in calculating the average reported sales price per acre for Region 11. The South Metro Fringe, the most agriculturally active sub-area in the Greater Metropolitan Area, has an average reported sales price per acre of $1069. The North Metro Fringe has historically been less agriculturally productive than the Southern Metro Fringe, which has been reflected in usually lower sales prices. Note that in 1980, sales prices realized in the South Metro Fringe counties averaged $2097 per acre, compared to $117 0 per acre in the North Metro Fringe area (Table 8). Since 1980 this gap has steadily narrowed and in 1985 farmland sales prices per acre in the North and South Metro Fringe counties were virtually equal. The South Metro Fringe reported sales price reflects a nominal decline of 27 percent from 1984 to The average reported sales price per acre for the North Metro Fringe declined during the same period by 18 percent. These figures can be incorporated into the earlier separation of the Minnesota rural real estate market into bands of declining prices. The South Metro Fringe is a transitional area between the agricultural South and the Seven County Metro Area. t is not surprising to find that the declines occurring in the South Metro Fringe lie between the 30 percent declines of the South and the narrow oasis of declines of 16 and 13 percent in Region 6E and 11. The analysis of the North Metro Fringe also suggests that the same band that includes Regions 11 and 6E should include the counties of the North Metro Fringe. This analysis makes it clear that the urban influence of the Twin Cities area has had a decelerating effect on declining farm values in the fringe counties around the metropolitan area. This effect was most apparent in the North Metro Fringe, which had percentage declines in average reported sales price rough! y in the middle of the declines of Regions 7E and 11. This decelerating effect was less strongly felt in the Southern Metro Fringe counties, where the drop in average sales price was closer to the large declines characterizing the high-priced lands of southern Minnesota. SECTON FOUR The Rural Real Estate Market in Southwest Minnesota This section looks at land values in the southwestern quadrant of the state to examine relative declines in land values among areas that are all predominantly agricultural. For this purpose the southwestern portion of the state is divided into three sub-areas, based upon relative crop yields and climatic conditions (Figure 4). The Low-Risk area has had historically high land values and a relatively stable weather pattern. The High-Risk 7

8 Figure 4. High-Risk, Low-Risk, and Transitional Areas of Minnesota, Table9. Analysis of Reported Farm Sales, High Risk, Transitional, and Low Risk Areas, S.W. Minnesota, tem High Risk Area Number of Sales (Jan.-June) Average Size Tract (Acres) Average Sales Price Per Acre (Dollars) Changes in Sales Price Over Preceding Year % Transition Area Number of Sales (Jan.-June) Average Size Tract (Acres) Average Sales Price Per Acre (Dollars) Changes in Sales Price Over Preceding Year % Low Risk Area Number of Sales (Jan.-June) Average Size Tract (Acres) Average Sales Price Per Acre (Dollars) Changes in Sales Price Over Preceding Year % area, on the other hand, has had lower land values over time and has also had larger fluctuations in climatic conditions. The Transitional area is just that: counties whose climatic variability and agricultural productivity fall between the characteristics of the High-Risk and Low-Risk areas. While the Low-Risk area has had the highest land values in the state for the past decade, the 1985 average reported sales price per acre of $1345 was lower than the average reported sales price of the Seven-County Metro Area ($1423). As one should expect, the average sales price per acre of $783 in the High-Risk area was substantially below that of the Low-Risk area (Table 9). The average 1985 sales price of $1011 for farmland in the Transitional region fell in between. The results of this analysis show a continuing trend noted in the survey for 1984: The gap between sales prices in the High-Risk and Low-Risk Areas is diminishing. n 1981, for example, the difference between the average sales price of land in the High-Risk and Low Risk areas was $1601. This gap narrowed in each successive year to a 1985 figure of $571. Disparities between the average sizes of tracts sold have also diminished in the past year; tracts sold in the Low-Risk areas have on average increased from 101 acres in 1984 to 115 acres in 1985, while the average size of tract sold in the High-Risk area declined from 167 acres to 151 acres, from 1984 to The declines in the average reported sales price per acre repeat the pattern of market activity witnessed for the state as a whole. n the High-Risk area the average sales price fell by 22 percent. Deflating with the CP, this drop represents areal decline of26 percent, or (using the GNP deflator for Personal Consumption Expenditures) a real decline of 25 percent. The average sales price for the Low-Risk area, on the other hand, fell by 31 percent nominally, representing a real drop of 35 percent or 34 percent, using the CP and GNP deflators respectively. The decline in the transitional area was in between these two extremes, with a nominal decline of 25 percent and real declines of 29 percent or 28 percent. These declines emphasize the conclusion that the richer agricultural areas suffered a greater percentage decline in land prices when measured by reported sales prices in

9 Expansion buyers again captured the greatest share of the market in Southwestern Minnesota, accounting for 83 percent of the sales in the High Risk area, 72 percent in the Transitional region, and 83 percent in the Low-Risk region. While expansion buyers still dominate the southwestern market, it is also true that the market share claimed by expansion buyers is down from 1984 levels. For example, expansion buyers in 1984 claimed 95 percent of the Low Risk land market, but "only" 83 percent of the market in nvestor buyers accounted for approximately 8-14 percent of sales in each of the three areas, while sole-tract buyers claimed 14 percent of the tracts sold in the Transitional area, 8 percent in the High-Risk area, and 4 percent in the Low-Risk area. The low number of sole tract buyers in the Low-Risk area reflects the relatively high cost of land in that region and the difficulty of mobilizing capital to finance a sole-tract venture. SECTON FVE Land Market Activity in 1985 The Minnesota Rural Real Estate Market Survey provides not only a guide to levels and trends in Minnesota farmland values, but also data on the level of market activity in the state. The sales volume in 1985 was sharply down, by 35 percent. Across the state only 796 sales were reported, in contrast to the 1,230 reported sales in 1984 (Table 0). The greatest percentage drops occurred in the Southwest, where the number of sales fell 53 percent and the acreage sold by 48 percent. Declines in the Southeast and West Central were also sharp, with drops of 35 percent and 32 prcent in sales and 35 percent and 36 percent in acreage sold, respectively. Smaller declines occurred in the East Central region, while the Northwest and Northeast actually reported an increase in sales activity in There is always a risk in a survey of this type that changes in sales activity may be a result of diminished reporting. The possibility that this may have occurred in 1985 is reduced by the fact that the number of respondents in 1985 (732) showed little change from the number of respondents in 1984 (747). The decline in sales activity is supported by the subjective opinions of the respondents. n each region, less than Table 10. Number of Reported Sales, Acreage of Land Sold and Average Acres Per Sale, by District, Minnesota, January-July 1, No. of Sales* Acres Sold Acres/Sale District Southeast ,878 45,520 29, Southwest ,127 52,855 27, West Central ,190 34,771 22, East Central ,421 15,599 10, Northwest ,211 15,023 16, Northeast ,007 1,346 7, Minnesota , , , *These sales should not be interpreted as a record of total farm land transactions for the years indicated. The majority of farm land sales are completed in the first half of the calendar year, which explains the choice of the January 1-July 1 reporting period. Some sales do occur in the latter half of the year, but they are not included in the data reported. Table 11. Estimated Proportion of Farm Land Sales in which Brokers or Dealers Participate, Minnesota, by District, South- South- West Year east west Central percent of the respondents said they felt that the number of farms sold had increased over 1984 during the survey period (January 1 to July 1, 1985). n the Southwest, the Southeast, and the West Central regions, over half of the respondents reported that sales volume had decreased. n the Northwest and the Northeast, over half of the respondents in each region reported that the volume of sales had remained the same. The smaller drop in the East Central region is mildly supported by respondents, with an almost tie between those who believed no change occurred and those who believed that sales activity in 1985 had declined. While the accuracy of these subjective responses depends primarily on the expertise of the respondents, they support the aggregate statistics showing that farmland sales in Minnesota dropped in 1985 by a signifi- Sales with Brokers' Services East North- North- Central west east Minnesota cant amount. Although the volume of sales fell, the participation of brokers in sales increased (Table 11). Brokers in 1985 were reported to have participated in 58 percent of the sales, up from 53 percent in n four of the six regions, the direction of change in average acres per sale was the same as the direction of change in the percentage of sales using brokers. This should be expected. As the size of farms becomes larger, there is an increasing tendency to rely on the expertise of brokers in accomplishing the sales. The increased use of broker's services is also consistent with reduced market activity. n a market where sales are few and prices falling, those wishing to sell rural real estate turn more readily to brokers for help in finding willing buyers. 9

10 ndex of Real Value per Acre of U.S. Farmland % of February 1, ,..., "'""' 1- f-. rf""""' r- r- r- _, , T r 85 Change in Real Value per Acre from Previous Year Percent Excludes Alaska and Hawai1 The indices of real farmland value computed by drvrdrng the nominal land value rndices by the Consumer Price ndex. 10

11 Land Values per Acre Dollars Mountain Percent Change in Land Values % change Mountain (-9) Average, New England States '>+--15 k;;,<i:ll~ Pacific 1985 data. Southern Plains Corn Belt Pacific (-4) Southern Plains (29) Percent change State average, -19 percent. Regional averages in parenthesis. Appalachian (-3) nterest Rates on Farm Real Estate Loans Percent 20 ~ , Capital Gains $billion ~ Life insurance companies Federal land bank rates exclude new loan fees and charges the stock borrowers are required to buy. Changes in farm real estate values less net capital investments, mostly unrealized. Other physical assets include machinery and motor vehicles, livestock and poultry, and crops stored on farms.

12 Farm Real Estate Taxes Dollars Tax per $100 market value ncludes Alaska and Hawaii beginning in AGRCULTURAL EXTENSON SERVCE UNVERSTY OF MNNESOTA Dale C. Dahl... Editor Prepared by the Agricultural Extension Service and the Department of Agricultural and Applied Economics. Views expressed are those of the authors, not necessarily those of the sponsoring institutions. Address comments or suggestions to Professor Dale C. Dahl, Department of Agricultural and Applied Economics, 1994 Buford Avenue, University of Minnesota, St. Paul, MN Please send all address changes for Minnesota Agricultural Economist to Barb Marsh, 231 Classroom Office Building, 1994 Buford Ave., University of Minnesota, St. Paul, MN The information given in this publication is for educational purposes only. Reference to commercial products or trade names is made with the understanding that no discrimination is intended and no endorsement by the Minnesota Agricultural Extension Service is implied. The University of Minnesota, including the Agricultural Extension Service, is committed to the policy that all persons shall have equal access to its programs, facilities, and employment without regard to race, religion, color, sex, national origin, handicap, age or veteran status. UNVERSTY OF MNNESOTA, U.S. DEPARTMENT OF AGRCULTURE, AND MNNESOTA COUNTES COOPERATNG Gordon D. Rose Extension Economist Agricultural and Applied Economics AGRCULTURAL EXTENSON SERVCE U.S. DEPARTMENT OF AGRCULTURE UNVERSTY OF MNNESOTA ST. PAUL, MNNESOTA BULK RATE POSTAGE AND FEES PAD USDA PERMT NO. G268 OFFCAL BUSNESS PENALTY FOR PRVATE USE-$300 No. 650 January