Ag economists recommend cautious land purchasing

Falling commodity prices may shift farmland values in the near future.

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

"The next couple of years for farmland values are going to be a little less certain than the last few years have been," said Craig Dobbins. "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.”

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 entitled 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 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 stated. "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."

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