With planters in the field, farm land sales will take a bit of a hiatus and begin again in the fall, but where they will resume may or may not be where they left off. Iowa farmland auctions had set the records in the $15,000 to $16,000 range, but Central Illinois auction prices are not far behind. And with such reports, come the persistent questions of how those values can be sustained. Reasonable questions.
At the Farm Foundation’s early April Forum on land values, Purdue University economist Brent Gloy reviewed some of the dynamics pushing and pulling on land values and identified both the drivers and the risks in getting into the bidding spirit. While Gloy analyzed cropland values reported by USDA last August, the double digit rises in Cornbelt land values remain in high gear, and many prices of last August have long been exceeded by the latest bidders. Gloy asked nearly 200 prospective farmland owners this spring for their perceptions on value and the price of 80 acres of farmland capable of producing 165 bushel corn without irrigation. They told him the value would range from $1,500 to more than $12,000 per acre. He said 65% of the potential buyers felt the auction price was higher than their perception of value. And 53% of the respondents believe farmland prices are in an inflationary bubble. Even with high prices, 73% of them are interested in buying more land in the next 5 years.
Gloy observed that today’s earnings and interest rates make farmland prices attractive. He adds that the fundamentals driving land values yesterday may not be effective today, and tomorrow’s fundamentals are also not necessarily duplicated from those of today. Today’s drivers include biofuel demand, a strong demand for farm commodities from emerging markets, and a combination of weather and poor yields. Additionally, the low interest rates make farmland earnings a valuable alternative. The demand for grains produced stems from acreage of soybeans destined for China and the corn needs of the ethanol industry. Both of those have more than tripled in the past decade. The export of soybeans to China is only one instance of exports having a positive effect on land values. Gloy and his Purdue colleagues found a strong relationship between farm prices and exports. Over the course of the past two decades, Gloy says it has been difficult to earn positive returns from Indiana farmland, with annual budgets frequently showing a loss. But in the current and past five crop years, five have shown a budgeted profit at levels unseen previously.
When comparing farmland earnings in the form of cash rent, and then comparing those rent values to current low interest rates, Gloy contends that farmland prices look very high at today’s levels. Over the past 20 years, farmland rent has ranged from 22% to 45% of the revenue attributed to various farming inputs. Other inputs, including machinery and other variables have generally been between 15% and 20%, while the combination of fertilizer, seed, and pesticides has averaged from 20% to 30% of revenue. The revenue to be expected from farmland, and generated by grain prices has recently climbed to a new plateau. That new level included corn prices at an average of $4.60, soybeans at $11.60, and wheat at $5.80, all nearly double the price averages of the prior 20-30 years. Most farmers have a stable outlook on crop prices, according to the nearly 200 that Gloy surveyed. While he asked for a range on corn prices over the next five years, about two out of three expect it will range from $5 to $6 per bushel.
Gloy notes that governmental policies are also a major driver of land prices, particularly for biofuels, crop insurance, and environmental policy. However, macroeconomics will also have an impact because of interest rates, currency exchange rates, and demand for farm products due to income growth. But he warns of the risk built into commodity values and demonstrates the fluctuation in value of the nearby futures contract for corn. From 2007 to 2009 it fluctuated from $3 to $7.50, and then spent two years in the $3 to $4 range before climbing to $8 and settling at the current $6.50 level. The Purdue economist believes there is room for land prices to climb further, but there are risks associated with that. Those include interest and capitalization rates, the use of borrowed money to buy land, challenges to demand growth, varying strength of exports, and whether corn prices will remain at higher levels.
Farmland prices have exploded upward, driven by demand for commodities and low values for alternative investments. Farmland has to earn its value, and part of that is the current high revenue generated by corn and soybeans, which has been a recent phenomenon. For such revenue to continue, and to support high values for land, either through grain sales or cash rent, it will require federal farm policies and international macroeconomics.
Source: FarmGate blog