Purdue Extension agricultural economists who follow farmland values agree that farmers need to carefully assess land prices and farm financial health before investing.
According to the Purdue Farmland Value Survey, Indiana farmland values have nearly tripled in the last 10 years – from an average of $2,509 per acre in 2003 to $7,446 in 2013. But abundant corn and soybean crops in 2013 have caused commodity prices to fall, making farm profit margins much tighter. Less profit means less money available to invest in farmland.
AgDay: Land Values Slip
Farm income increased in the fourth quarter of 2013 (relative to a year earlier), according to the latest Agricultural Finance Monitor, published by the Federal Reserve Bank of St. Louis.
While this hasn’t yet reduced the demand for farmland, Craig Dobbins said it could.
“The next couple of years for farmland values are going to be a little less certain than the last few years have been,” he said. “Commodity prices have come down significantly in the last year, so these large returns we’ve kind of become accustomed to for the last few years have now shrunk.”
“The probability of farmland values staying flat or seeing a small decrease is much bigger than the probability that we’re going to see another double-digit increase.”
That uncertainty prompted three of Dobbins’ colleagues with Purdue’s Center for Commercial Agriculture to publish a paper that takes a closer look at what the current farmland market could mean for buyers.
The paper, Farmland: Is it Currently Priced as an Attractive Investment? is authored by agricultural economists Tim Baker, Mike Boehlje and Michael Langemeier. In it they analyze farmland value trends and compare the attractiveness of investing in farmland with that of other investment portfolio choices, in terms of long-run risk, return and inflation hedge characteristics.
While the results showed that farmland can be a good investment when compared with stocks, they also showed that now might not be the right time to make a purchase.
“Even though our data confirms the conventional wisdom that farmland has high returns, low risk and is a good inflation hedge, the current price to rent ratio suggests this is not a good time to buy,” the paper states. “Those purchasing farmland today should not ignore the prospect of ‘buyer’s remorse.'”
For farmers who are still considering a farmland purchase, Dobbins said it’s important to do an overall farm analysis to see how the added expense would fit.
“If the purchase fits in well with the plan for the farm business and there are sufficient cash reserves to withstand a downturn for the next two to three years, then go ahead,” he said. “But if it in any way threatens the farm business then I would want to be very, very cautious about making this purchase.”
While farmland values likely will hold steady for much of 2014, Dobbins said cash rents likely would come down sooner. With current crop input costs, the breakeven price for corn would be $5 per bushel. Right now corn prices look to stay closer to $4 per bushel.
The shrinking or even disappearing profit margins mean growers won’t be able to afford the high cash rental rates of recent years.
“Tightening crop margins may have a more immediate impact in the cash rent market,” Dobbins said. “For those using flexible cash leases or crop-share leases, an automatic downward adjustment in 2014 will likely occur. For those with a multi-year lease established under the assumption that corn and soybean prices would remain high, there may be a need to visit with the landowner.”
By Jennifer Stewart, Purdue University