Economists urge caution before buying farmland

Economists urge caution before buying farmland

Falling commodity prices have potential to shift farmland values in near future.

PURDUE University Extension agricultural economists who follow farmland values are recommending that farmers carefully assess land prices and the farm's financial health before investing.

Abundant corn and soybean crops in 2013 have caused commodity prices to fall, making farm profit margins much tighter — and less profit means less money available to invest in farmland.

"The next couple of years for farmland values are going to be a little less certain than the last few years have been," Purdue professor of agricultural economics Craig Dobbins 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," Dobbins added.

According to the Purdue "Farmland Value Survey," Indiana farmland values alone have nearly tripled in the last 10 years — from an average of $2,509 per acre in 2003 to $7,446 in 2013.

That uncertainty prompted three of Dobbins' colleagues with Purdue's Center for Commercial Agriculture to publish a paper titled "Farmland: Is It Currently Priced As an Attractive Investment?"

Authored by agricultural economists Tim Baker, Mike Boehlje and Michael Langemeier, the paper analyzes farmland value trends and compares 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 compared with stocks, they also showed that now might not be the right time to make a purchase.

"Even though our data confirm the conventional wisdom that farmland has high returns, low risk and is a good inflation hedge, the current price-to-rent ratio suggests that this is not a good time to buy," the paper notes. "Those purchasing farmland today should not ignore the prospect of buyer's remorse."

For farmers who are still considering purchasing farmland, Dobbins said it's important to do an overall farm analysis of the added expense.

"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, but if it in any way threatens the farm business, then I would want to be very, very cautious about making this purchase," he said.

While farmland values likely will hold steady for much of 2014, Dobbins said cash rents are likely to come down sooner. With current crop input costs, the breakeven price for corn would be $5/bu. Right now, corn prices look to stay closer to $4/bu.

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 multiyear lease established under the assumption that corn and soybean prices would remain high, there may be a need to visit with the landowner."

Farmers National Co., a leading agricultural real estate and farm and ranch management company, recently reported that despite lower commodity prices and decreased gross incomes, farm profitability remains good due, in part, to a 30% drop in fertilizer prices since 2012 and carryover grain sales from the previous crop year.

"Demand for high-quality property is keeping both land values and rental rates strong," said David Englund, executive vice president of farm and ranch management at Farmers National. "Overall, lease rates are higher on quality land if the land was rented below market in 2013, but rates across the board are mostly level. Fertilizer costs are expected to drop further in 2014, which will help farmers remain profitable."

The desire of farm owners to expand existing operations is leading to highly aggressive sales activity and keeping the demand for farmland strong. In addition, there has been a trend for young people to come back to family farm operations, prompting additional demand for land.

"As a result of these factors, lease rates for land should remain steady and strong throughout the year," Englund suggested.

Volume:86 Issue:12

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