A survey indicating that farmland values are expected to continue increasing is more good news for landowners, but could also signal caution for buyers, an agricultural economist says.
The survey was conducted at the winter meeting of the Indiana Chapter of Farm Managers and Rural Appraisers. The results come on the heels of a February 2012 issue of AgLetter in which the Federal Reserve Bank of Chicago indicated farmland values in Iowa, and parts of Indiana, Michigan, Wisconsin and Illinois have increased by 22 percent since early 2011. That is the largest annual increase since 1976.
"These numbers tell us that the farmland market is very competitive. There are far more buyers than sellers," said Craig Dobbins, Purdue Extension agricultural economist. "People in the market to buy farmland have a very optimistic outlook about the future, and they are willing to pay unthinkable prices."
According to the survey of 32 farm managers and rural appraisers from 25 Indiana counties, the average estimated price of farmland was $7,533 per acre, and all of the respondents indicated their estimated price was higher than the value in February 2011.
While the increases are good news for landowners, Dobbins said there are dangers associated with paying exceptionally high prices to own farmland.
"One of the dangers is that buyers' expectations about the future of the market could be wrong," he said. "If land values or commodity prices decrease, that can really change profit margins. And it doesn't have to be a drastic decrease."
Borrowed money a concern
More severe problems can occur if buyers borrow a substantial amount of money to finance land purchases.
"Buyers need to be careful because farm debt levels will affect how hard the fall could be if commodity or farmland values decrease," Dobbins said.
With the strong market, rental prices for farmland also have been on the rise. Survey respondents indicated the average 2012 cash rent was $253 per acre. A majority reported that rate was higher than it was in 2011, and only two reported their rental rates to have stayed the same. None had decreased.
According to Dobbins, the increasing cash rents have led some landlords and tenants to get creative in lease agreements. While 42 percent of respondents said lease agreements were traditional fixed cash, others were using flexible lease agreements and crop share leases.
In a flexible lease agreement, or variable cash, the landlord and tenant agree on a minimum amount of rent and share a portion of the profits. In a crop-sharing agreement, the tenant and landlord both invest in the production costs and share the crop yields after harvest. Both types of agreements help tenants and landlords share the risk associated with crop farming.
While all of the survey participants agreed that farmland values were on the rise, they did not agree about the change in land values over the next five years. Forty-eight percent of the respondents indicated farmland values would be higher, 31 percent thought there would be no change, and 21 percent expected them to decrease.
"These results indicate that, in the short-term, Indiana's farmland market is expected to remain strong," Dobbins said. "No one expects farmland values to decline for the year. But relative to the past few years, respondents expect the rate of increase to be much less.
"Longer-term, there is less certainty in how farmland values will change. Most respondents expect farmland values to be steady or higher, but sound risk management suggests that buyers need to explore the effect of a 15-20 percent decline in farmland values on the business."