The upward spiral in farmland values shows no signs of peaking, according to county assessors and lenders in Southwest Minnesota.

Some counties are recording sales approaching or as high as transactions in the eighties before the bottom dropped out. More outside investors are purchasing land today, but the majority of buyers are local, well-established farmers.

No one can predict what the market will bear, but most hope circumstances today are different.

Lenders say interest rates are considerably lower now and that banks generally demand higher down payments. Their customers either are using farmland they already own as collateral or are transferring cash from other investments to make down payments (see related story).

Some county assessors who were around when land values took a dive in the eighties say they cannot help but be a little nervous. Others say current conditions might have changed the equation for calculating cash flow, making the rise less serious than before.

"I would hope something is different -- I would hope that the lenders are being a little bit more careful," Laurel Walker, Murray County assessor said.

Low interest rates for investments and loans probably contribute to the spiral, Walker said.

"People can invest in that land probably feeling that they'll have a better chance of making some money than putting it in CDs at the present interest rates," Walker said. "They're scared of the stock market right now and the low interest for money to buy land is attractive. But it still has to pencil out or it's not worth it."

Normally, $700 to $800 would be a high sale in Lincoln County, assessor Bruce Nielsen said. However, in recent months he has seen a dozen sales at more than $1,200 an acre. Consequently, even though he increased values about 25 percent this year, he still is low by about 25 percent.

"Hopefully we get some sales in over the course of the next six months that are going to turn some of that around," Nielsen said.

A seller's market

Current land prices are good for sellers and bad for buyers trying to expand, Tom Houselog, Rock County assessor said.

"You're not seeing young farmers getting going," Houselog said. "These are well established farmers that are just expanding."

The number of sales has dropped considerably in the last two or three years, but what is selling is going for much higher than its current value, he said. Average tillable values range from $1,290 to $2,089, and land is selling for $2,500 to $3,000.

"That's kind of uncomfortable," Farley Grunig, Pipestone County assessor said.

The danger is that the market is based on other people having that much faith in the future, he said.

"People have to go in it with their eyes open," Grunig said. "It's like somebody told me a long time ago -- if you can pay cash, nothing's too expensive. So if you have that philosophy, that's fine. But if you're buying on credit, I don't know.

"Almost every sale that we had in 1987, '88, was by farm credit or some other lending institution where they had taken property back and were reselling it. It just basically destroyed the market for a period there, and we ran a lot of people out of business and other people just got bigger."

McCleod County Assessor Hal Kirchoff suspects many farmers are putting up land they already own as collateral and trying to balance the sheet.

"They tried to do that in the eighties and it didn't (work)," he said.

Most farmland in McCleod County is selling in the $2,000 range, but some land about a mile outside Glencoe recently sold for about $4,500 an acre, he said.

"Even at $2,000 an acre, if you get 6 percent interest on it, you're looking at $120 an acre. You might be able to get that in rent, but then you've got tax, which might be anywhere from $10 to $20 an acre, and insurance, so there's really no way that that's going to cash flow," Kirchoff said. "The only thing is if the farm subsidies are still a factor in that price."

Many sales in Brown County -- where values are up 15 percent on average -- went through before people really knew anything about the new farm program, assessor Judy Friesen said. Only time will tell if and how the bill will affect future sales, she said.

In Chippewa County many of the sales have been cash, said assessor Carole Schutz, who had just started working in the assessor's office in the eighties when land values took a dive.

"Land was selling for over $2,000 an acre, and now we're starting to get back there. We've had some sales of $1,900 an acre," Schutz said. "My ratios are like 75 percent. That's not encouraging. And that's scary to me in the respect that if you listen to what's going on in the farm economy, I don't know how people can make it cash flow."

With land selling for $2,400 to $2,600 an acre in Nobles County, making it cash flow is impossible, assessor Byron Swart said. Manure generated from confinement barns is coming into play on poorer land in the western part of the county.

"[Farmers] are not going to give it away, they're not going to pay to get rid of it, so they're buying more farmland to put it on," Swart said.

Prices in Yellow Medicine County are a couple of hundred dollars below the eighties' high, but it still is a worry, assessor Connie Erickson said.

"The sales certainly don't reflect what the farm economy is," she said.

Rental rates are up as well, Gale Bondhus, Cottonwood County assessor said.

"We're trying to figure out how in the world they're going to generate the income to pay for it," Bondhus said. "Time will tell, I guess."

Cash flow might have changed

Normally when you talk of cash flowing a property, interest rates are higher, Dave Oelslager, Kandiyohi County assessor said.

"Ten or 15 years ago [rates] were as high as 10-plus percent," Oelslager said. "Now, an average mortgage on a piece of farmland might be half that. So, what is a cash flow? It is possibly a little different formula now than it was three or four years ago."

If you talk to farmers and look at the economics, it doesn't seem to make sense, Edward Pederson, Swift County assessor said. However, the purchasing power and worth of a dollar is less than it was in 1982.

"Then you kind of wonder is it that high then. Dollar for dollar it certainly is the same number," he said.

The break-even point right now in Jackson County is probably less than $1,200 an acre, assessor Larry Bahr said. People are paying considerably more than this for land but nowhere near the high-water mark of $3,000 to $3,800 in the eighties.

"Every time I see the economy starting to suffer I see farmland increase in value. And the only reasoning behind that in my mind is that you can still get some sort of a halfway decent percentage return on your money, whether it's going to be a good crop year and you do OK that way or you end up with a government payment," Bahr said.

The top value in Renville County is around $2,000, but land has sold for as high as $2,800, assessor Delton Zimmer said.

"What's scary is if you do a survey sometime of the average age of a farmer out here. Who's going to take over these large corporations?" Zimmer asked. "Will it be all big corporations and investors and we'll be cotton pickers out here? Who's going to have the capital to buy them out? A young person cannot, and they don't have any kids that are interested in it."

If you talk to the old-timers, they remember when building sites were everywhere, Zimmer said. An average farm today is close to 8,000 acres.

"The buildings are gone, the groves are gone, the line fences are gone, there's nothing to stop the wind, the snow," he said.